News  Last Friday, PETGAS announced that together with DIALOG (OP; TP: RM1.75) and the state government of Johor, it is forming a 65:25:10 JV company to develop a regasification terminal (RGT) in Pengerang Deep Water Terminal.

 This new RGT, with 3.5m metric tonnes per annum (MTPA) capacity, is estimated to cost c.RM2.7b with PETGAS’s portion of c.RM2b. It is expected to commence construction by 2Q15 and to be operational by 4Q17.

 In a separate announcement, PETGAS said it has awarded the EPCC contract of the Pengerang RGT, which is worth USD486.6m (c.RM1.5b) to a Samsung C&T Corporation led-consortium for a contract period of 55 months, commencing Oct 2014.

Comments  This long-awaited news is definitely positive, which keep the continuation of earnings growth at PETGAS. This will be its third RGT asset after the Melaka RGT and Lahad Datu RGT.

 Assuming debt to equity ratio of 80:20 and RGT period of 20 years, this new RGT could contribute RM90m-RM145m yearly at full capacity to PETGAS based on 65% equity stake.

 We believe the 80% debt assumption is on the conservative side given its solid balance sheet. As at Sep 2014, PETGAS posted a total borrowing of RM832.0m or gearing of 0.08x. At net level, PETGAS is at net cash of RM0.69m. Given its strong operating cashflow of c.RM3b a year, PETGAS may not need external funding. However, given that this is JV company, debt financing is a likely scenario.

 The 65% stake in Pengerang RGT could add RM1.01/DCF share to PETGAS’s SoP.

Outlook  PETGAS’ FY14 earnings are expected to reach a new high, mainly propelled by the full-year contribution from the Melaka RGT and the start of Kimanis IPP at end-2Q14.

 Although there is still no progress on the Lahad Datu RGT, the Melaka RGT and IPP mentioned above together with the RAPID RGT in Pengerang would be the next earnings catalysts for PETGAS.

Forecast  We had earlier mistakenly treated Kimanis IPP as subsidiary as this is a 60:40 JV. As such, we have amended Kimanis IPP’s contribution to the JV/Associate Income line. Thus, we cut our FY14-16E estimates by 4%-6% on this adjustment. However, we do not incorporate Pengerang RGT as the operational date is 4Q17, which is beyond our forecasts horizon.

Rating Maintain MARKET PERFORM.

Valuation  Although this new RGT is earnings and value accretive, the value is already priced-in. Our new price target is now RM22.14/SoP share, from RM21.24/SoP share previously, mainly on the inclusion of Pengerang RGT valuation.

Risks to Our Call   Delay in the commencement of Lahad Datu RGT and Pengerang RGT.

Source: Kenanga