We maintain our UNDERPERFORM call on PETGAS following last Friday’s analyst briefing as the new Gas Processing and Transportation Agreements will not have any material impact to its earnings prospects. Thus, its share price is still ahead of its valuation. The new agreements mark a new set of tariff structure for the next 20 years with key reservation charge remain fairly unchanged while operational efficiency is the key to determine its future profitability. While the first block of Kimanis IPP is set to start in end 2Q14 and there is still no progress on Lahad Datu RGT, the just approved RAPID will be the next earnings catalyst for PETGAS on the new LNG RGT, although the project will only start earliest by 2018. We have trimmed FY14 EPS by 0.7% as we had earlier assumed the Kimanis IPP to start in early 2014. Meanwhile, we also launch FY15-FY16 estimates where earnings are expected to grow at 3%-6%. Our new TP is now RM21.54/SoP share from RM20.77/SoP share as we rolled over our valuation base year to CY15 from CY14.

New 20-year GPTA. Last Friday, Petronas Gas Bhd (PETGAS) had an analyst briefing in regard to the new Gas Processing and Transportation Agreements (GPTA) which was announced on 31 March. On contrary to the old single GPTA agreement, the new one is segregated into several separate agreements: (i) Gas Processing Agreement (GPA) and (ii) Gas Transportation Agreement (GTA), and (iii) Agent Services Agreement. The first term of this new agreement will take effect from April 2014 to Dec 2018, with three other terms with a 5-year interval starting Jan 2019 and ending in Dec 2033 for a duration of 20 years.

No much changes to new agreements. Although there are changes in new Term Fee as compared to the old Term and it also introduced new GTA Sabah for customers in Kimanis as it started operation in Jan 2014, the net impact is fairly the same. For instance, under the old 4th Term Fee, the measurement of reservation charge was based on feed gas with tariff rate of RM1,642/mmscf and threshold of 2,100 mmscfd whereas under the new Term Fee, the reservation charge will be measured based on sales gas with RM2,330/mmscf tariff rate and threshold of 1,750 mmscfd. Although the tariff is 42% higher, sales gas threshold is 17% lower than the feed gas threshold, resulting in a neutral impact on the net basis. However, the incentive will come from operational efficiency via Performance Based Structure (PBS) which will be the determining factor of its profitability. (please refer to tables in the following pages)

RGT in RAPID is a new earnings catalyst. While there is no progress on the Lahad Datu RGT, we understand that the first block of Kimanis IPP will start in end-2Q14, which is opposed to our earlier assumption of Jan 2014. On the other hand, PETGAS will be involved in the LNG RGT for the just approved RAPID project in Pengerang. Capacity of the RGT in RAPID will be similar to that of Melaka RGT, with c.80% capacity mainly catering to RAPID. Management expects the FID of this LNG RGT to be out in two months’ time. Assuming the refinery start-up is by early 2019, the RGT would possibly be ready by mid-2018. Thus, earnings contribution would only be seen from 2Q18 onwards.

Still an UNDERPERFORM. We trim FY14 estimate slightly by 0.7% as we now assumed the Kimanis IPP to start in end-2Q14. At the same time, we also introduce FY15-FY16 estimates where earnings are expected to grow at 3%-6%, led by the Melaka RGT and Kimanis IPP. Overall, although we like its business models, which have stable income stream, share price of PETGAS had raced ahead of its valuations. Our new price target is now RM21.54/SoP share from RM20.77/SoP share as we rolled over our valuation base year to CY15 from CY14. UNDERPERFORM maintained.

Source: Kenanga