The long-awaited TPA, which was delayed twice in the past two years, is finally implemented, starting yesterday. Earnings impact is expected to be neutral and should cleared earlier concerns of severe rate cut. We cut merely 1% of FY19 estimates. The IBR framework, which provides transparency and efficiency-driven reward system, is positive for both PETGAS and end-users. OUTPERFORM retained at RM22.65.

TPA is finally here. Last Monday, PETGAS announced that the government, through Energy Commission, has prescribed the Incentive Base Regulation (IBR) framework in setting the Base Tariff in 2019 for the Peninsular Gas Utilisation (PGU) at RM1.072/GJ, Melaka RGT at RM3.518/mmbtu and Pengerang RGT at USD0.637/mmbtu. In addition, it also revealed the 2

nd term of remuneration structure of Gas

Processing Agreement (GPA) of: (i) fixed Reservation Charge of RM2,524/mmbtu from RM2,300/mmbtu, (ii) flow rate charge of RM0.20/GJ of dry gas processed above the committed target of 1,750mmbtu per day, (iii) performance incentive for higher overall equipment effectiveness performance targets for Ethane, Propane, Butane as well as the production target for Ethane, and (iv) penalty and incentive system for operating within the +5%/-5% range for Agreed Operating Parameters.

To purchase linepack/heel from Petronas. Separately, PETGAS is paying parent Petronas RM108.0m for the purchase of linepack for PGU and heel for Melaka RGT and Pengerang RGT under the requirement of Third Party Access (TPA). Linepack is the minimum quantity of gas in the pipelines which allows the instantaneous offtake of natural gas from the pipeline system and provides sufficient buffer to cater for fluctuations of gas demand within the PGU system. Heel is the minimum amount of LNG that is required in the RGT’s storage tank. Under the TPA code, the facility owner, PETGAS, for both PGU and RGT, is required to own the linepack and heel to operate the facilities. Nonetheless, PETGAS remains as the facility owner as a gas processor and transporter with the required linepack and heel, the remaining molecule is still owned by Petronas currently, or new supply players under TPA in the future.

Minimal earnings impact. We expect neutral earnings impact from the TPA as the higher fixed Reservation Charge of c.RM124m is offset by the lower Base tariff against our assumptions of RM1.232/GJ for PGU and USD1.00/mmbtu for both Melaka RGT and Pengerang RGT. Besides, the RM108m purchase of linepack and heel will also reduce its cash position mildly. In all, while maintaining FY18 estimates, we trimmed FY19 forecast slightly by 0.9% to reflect this announcement. Nonetheless, we remain optimistic on the company as the TPA offers transparency with detailed RGT tariff, which was not made known previously. And, the announcement also reaffirmed our view on the TPA which we always believe the IBR framework will be earnings neutral to PETGAS and this announcement will also clear any concerns that TPA could severely impact its earnings on lower rate.

Keep OUTPERFORM. Like its sister companies, PETGAS is one of the few stocks performing well in share price performance last year as investors seek for earnings quality and sustainability in time of uncertainty like the present times. We believe with this announcement, which is better than what the market had expected, the stock which was suppressed in the past two years, will be able to re-rate to its pre- 2017 period. Post earnings adjustment, our target price is reduced to RM22.65/SoP share from RM22.80/SoP share previously. OUTPERFORM maintained. Risks to our call include sudden drop in gas volume and severe penalty payment for its Utilities unit should it is unable to meet prescribed requirement.

Source: Kenanga Research - 02 Jan 2019