INVESTMENT HIGHLIGHTS

• Petronas Gas Bhd (PetGas) is revising 2019 gas tariff

• New tariff to impact gas transportation and regasification

• Gas processing to receive an +8.3% boost from the new reservation charge of RM2,524/mmscf

• FY19F earnings revised down slightly by -4.5%

• Downgrade to NEUTRAL with a revised TP of RM19.75 per share

New gas tariff for 2019. PetGas announced that it has received a letter from the Energy Commission (EC) date 26th December 2018 where EC has prescribed the Incentive Based Regulation (IBR) framework in setting the base tariff for the Peninsular Gas Utilisation (PGU), Regasification Terminal Sg. Udang (RGTSU) and; Regasification Terminal Pengerang in Johor (RGTP). The newly revised tariff are as follows:

Gas transportation. For this segment, the tariff was reduced to RM1.072/GJ from RM1.248/GJ under the new IBR framework. The Peninsular Gas Utilisation (PGU) system contributes about 23% and 40% in terms of revenue and profit respectively. Assuming that the volume remains the same, we anticipate that the revenue for the segment to reduce by -14.1%.

Regasification. Similarly, the regasification segment will also be impacted by the newly revised tariff. However, due to the lower contribution from the segment (c.10%) compared against the gas transportation, we opine that the segment would be minimally impacted by the new tariff.

Gas processing. Segment revenue is expected to grow by +8.3% as PetGas’ parent, Petroliam Nasional Berhad (Petronas) has agreed to pay a fixed reservation charge of RM2,524/mmscf (from RM2,330/mmscf previously) for gas processing as both enter into the second gas processing agreement (GPA) starting in 1st January 2019. This also includes a 20sen flow charge for each gigajoule of dry gas processed above the committed target of 1,750mmscf per day throughout the GPA term. Hence, we opine that this will bode well for PetGas as the gas processing segment accounts for about 24% and 23% of PetGas’ revenue and profit respectively.

Impact on earnings. We are reducing our earnings estimate for FY19F by -4.5% to account for the expected lower revenue coming from both the gas transportation and regasification segments.

Downgrade to NEUTRAL. We are downgrading our recommendation on PetGas to NEUTRAL (from Buy previously) with a revised TP of RM19.75 (from RM20.44). Our valuation is premised on forward PER19 of 21x pegged to EPS19 of 94.1sen. The target PER is based on PetGas’ rolling four-quarter average PER over six years. Our downgrade in recommendation is due to the expected adverse impact on the revenue and earnings of PetGas arising from the new reduced tariff. That said, we do expect the impact from the reduced tariff to be cushioned by the increase in gas volume transported and processed going forward as a result of the second GPA term.

Source: MIDF Research - 2 Jan 2019