The Energy Commission confirmed that there is no change in tariff until the end of 2018 which is highly positive for PETGAS, for now. This factor had been the main price dampener to the stock in the past year and will remain as an overhang until the new tariff is announced post 2018. Even then, we maintain that any changes in tariff would be earnings neutral. Maintain OUTPERFORM and target price of RM22.00/SoP share.

Current tariff to stay in 2018. Yesterday, Petronas Gas Bhd (PETGAS) announced that the Energy Commission (EC) has confirmed that the current tariff for the utilisation of the Peninsular Gas Utilisation system, RGT Sungai Udang and RGT Pengerang will be maintained until the end of 2018. At the same time, the Third Party Access (TPA), an integral part of the Gas Supply (Amendment) Act 2016, is in effect commencing today (16 Jan 2018) and the company is in full compliance with the technical and operational provisions of the act.

No change is positive for now. This news came not as a surprise to us given that the indication from the management earlier was that the new tariff structure is likely to be delayed as the authority needs more time to come out with a feasible framework to ensure the stability of the fee structure. To recap, share price of PETGAS had plunged since early last year as the share price declined from above RM21.00 level to its 52-week low of RM15.82 before recovering to current level of RM19.00. This was because the market was anticipating a severe cut in tariff which will dampen PETGAS? earnings.

We still expect earnings neutral post 2018. We keep to our similar view since early last year that the new tariff structure is expected to be earnings neutral to PETGAS. In our opinion, being a Petronas company, the government may protect PETGAS? interest to ensure earnings certainty. Moreover, based on experience of ICPT and GCPT mechanisms, TENAGA and GASMSIA suffered no negative impact with fuel and gas costs passed through to end-users eventually. As such, the new tariff post 2018 could turn out neutral for PETGAS.

TPA is not a threat. In our view, TPA is also not an earnings deterrent to PETGAS given that the company is purely a transporter and processer and is not involved in gas supply. In any case, the TPA will only affect its parent company Petronas and GASMSIA. However, individual user to bulk import gas/LNG supply may not be easy given the constraints of volume requirement and continuity of supply. We see potential heavy users such as TENAGA to source their own gas supply given their high volume requirement. Nonetheless, with the ICPT, there is no incentive for TENAGA to import gas/LNG given that the risk of fuel cost movement is transferred to end-user.

Retain OUTPERFORM. Although its share price has recovered c.19% from the recent low, we believe the stock is still undervalued. We maintain our estimates and price target price of RM22.00/SoP share unchanged. In the worst case scenario, we expect a negative impact on SoP and future earnings by 8%, if any. This latest development should be positive to its share price. Thus, we reiterate our OUTPERFORM rating on the stock. Risk to our call is a severe reduction of rates under the new tariff post 2018.

Source: Kenanga Research - 16 Jan 2018