1Q15 results met expectations. We maintain our NEUTRAL call, earnings forecasts an MYR22.40 TP (2% downside). We believe earnings growth will rise more significantly in FY18F with maiden contribution from the Pengerang regasification terminal. The stockoffers earnings defensiveness and solid fundamentals backed by continued industrialisation in Malaysia, and hence rising gas demand.

• 1Q15 net profit up 7.6% YoY. Petronas Gas’ 1Q15 net profit metexpectations, at 24%/25% of our/consensus full-year estimates. 1Q15net profit grew 7.6% YoY, driven largely by higher gas transportation and processing revenues on higher capacity booking by Petronas and a higher reservation charge pursuant to the new gas transportation and processing agreements effective 1 Apr 2014.
• Pengerang regasification the next growth catalyst. Over the medium term, Petronas Gas’ earnings growth will be driven by its 65% -owned MYR2.7bn regasification terminal project in Pengerang, Johor. Construction of the plant with an annual capacity of 3.5m tonnes (vis-àvis 3.8m tonnes for the existing Melaka regasification terminal) will start in 2Q15 with a targeted commercial operations date by 4Q17.
• Forecasts. We maintain our earnings forecasts.
• Risks: These include: i) missing efficiency targets, resulting in lower performance-based income, ii) lower gas transportation volume, and iii) delays in the completion of the Pengerang regasification terminal.
• Maintain NEUTRAL. Petronas Gas’ earnings growth is likely to be modest in FY15F-17F, but will rise more significantly in FY18F with maiden contribution from the Pengerang regasification terminal. We like the stock for its earnings defensiveness and strong long-term fundamentals backed by continued industrialisation in Malaysia, and hence rising demand for gas. We keep our SOP-based TP at MYR22.40, which implies FY15F P/E of 23.3x. We value Petronas Gas’ core operations based on DCF, ascribing a discount rate that is equivalent to its WACC of 7.1% and a terminal growth rate of 2%.