Review

• Petronas Gas Berhad (PetGas) reported FY16 core profit of RM1.73bn (- 21% YoY) that was within our expectations, and consensus’ - accounting for 103% of full-year forecasts.

• Weaker FY16 core profit was mainly due to higher taxes. Recall that in 2015, Pet Gas recognized chunky tax incentives of RM443mn for its new regasification project at Pengerang.

• Nevertheless, pretax profit expanded by 4% YoY. This was mainly driven by:- 1) lower utilities cost for gas processing (GPP) due to internal electricity generation from new cogen plant, and 2) higher utilities revenue due to higher ASPs from fuel gas price hikes in Jan and July.

• Pretax profit would have been higher if not for:- 1) capitalization and accelerated depreciation of plant refurbishment capex for gas infrastructure, 2) lower effective tariffs for gas transportation at Sabah in 2Q16, 3) higher repair and maintenance costs for regasification plant, and 4) revision of pass through terms for FSU opex charter hire.

• PetGas declared a final interim DPS of 19 sen (4Q15: 17 sen), bringing total FY16 dividend higher at 62 sen (9M15: 60 sen).

Impact

• Maintain earnings forecasts pending a tele-conference later at 4pm today. However, we introduce FY19 forecast of RM1.75bn.

Valuation

• Maintain Sell on Pet Gas with unchanged SOP target price of RM19.67. We prefer to avoid the stock mainly due to its expensive valuations (trading at historical forward P/E), coupled with lack of earnings catalysts.

• Tenaga (TP: RM17.19) appears more attractive at this juncture, given cheaper valuations (1SD below historical forward P/E), and possibility of international M&As to spur earnings growth

Source: TA Research - 24 Feb 2017