PGas’ operating expenses are expected to remain elevated in FY16 amidst its ongoing plant rejuvenation and revamp (PRR) project. We mildly tweaked our FY16F earnings by -4.5% while keeping our FY17F earnings largely unchanged. Maintain NEUTRAL with a new TP of MYR22.55 (from MYR22.40, 0% upside) as we roll valuations forward. It is investing in a new MYR2.7bn regasification terminal at the Pengerang Deep Water Terminal, which would significantly boost FY18F earnings uponcommissioning. However, this has been largely priced in.

Maintain NEUTRAL. Despite Petronas Gas’ (PGas) higher-than-expected opex in FY15, we believe its stable earnings outlook remains largely intact. We like PGas for its defensive earnings and strong long-term fundamentals, which arebacked by the continued industrialisation in Malaysia that should see a rising demand for gas. However, we believe there are limited ctalysts for its share price, while the earnings potential from its new regasification plant has been largely priced in. W e remain NEUTRAL on PGas with a revised TP of MYR22.55 (from MYR22.40) after rolling forward our DCF valuation for the core operations. Our TP implies an FY16F/17F P/Es of 23.9x and 23.1x respectively.Earnings tweak. We revised PGas’ FY16F earnings by -4.5% to factor in thehigher opex and lower associate contribution while we kept our FY17F earnings largely unchanged. We also introduce our FY18F earnings forecasts. We now expect FY16F earnings to grow by 7% (from 9.6%) before easing to 3.5%, and picking up to 8.6% in FY18F to reflect the contribution from the new regasification terminal in Pengerang, Johor.

Pengerang regasification the next growth driver. In the medium term, PGas’ earnings growth is expected to be driven by its 65%-owned MYR2.7bn regasification terminal project in Pengerang. Construction of the plant with an annual capacity of 3.5m tonnes (compared to 3.8m tonnes at the existing Melaka regasification terminal) is slated for commercial operations by 4Q17.Key earnings risks. These include: i) missing efficiency targets, resulting in lower performance-based incomes, ii) lower gas transportation volume, and iii) delays in the completion of the Pengerang regasification terminal.

FY15 results wrap up. PGas’ FY15 earnings trailed our estimates to make up 88% of our full year forecasts. The earnings shortfall was mainly due to higher operating expenses on the back of the ongoing PRR project. The regasification terminal in Sungai Udang, Melaka also saw operating expenses increase on a higher depreciation charge following an adjustment made to its development costs. The weaer results were also attributed to the softer associate contribution, which was inflated in FY14 by the recognition of the Deferred Tax Allowance at its Kimanis Power Plant, amounting to MYR154.5m.