Petronas Gas Bhd
(May 13, RM21.92)
Maintain buy with 12-month target price of RM25.40: PetGas’ earnings for the first quarter of financial year 2015 (1QFY15) grew 8% quarter-on-quarter (q-o-q) and year-on-year (y-o-y) to RM450 million, accounting for 26% of our full year estimate.

This was on the back of RM1.1 billion revenue (-1% q-o-q, +4% y-o-y).

PetGas’ 1QFY15 gross profit margin rose to 54.1% from 48.5% in 4QFY14 and 50.9% in 1QFY14), driven by improvements across its four major business segments.

Contribution from associates and joint ventures grew 42% y-o-y to RM23.8 million, likely due to strong earnings from the Kimanis power plant following the commissioning of all three blocks of the power plant since November last year.

PetGas declared a14 sen first interim dividend per share (DPS), or a total payment of RM277 million for the quarter. This is on track to meet our 60 sen full-year DPS target.

PetGas’balance sheet remained healthy with RM795 million (40 sen per share) net cash as at March this year.

Our outlook for PetGas reveals it will be a proxy to strong gas demand. The RM2.7 billion Pengerang regasification terminal (65% stake) with 3.5 million tonne annual capacity is expected to be operational by 2018.

It will mainly supply to Petroliam Nasional Bhd’s (Petronas) Pengerang Integrated Complex in Johor, though 10% of the gas will be supplied to the peninsular gas utilisation (PGU) pipeline.

We have pencilled in a 7% boost to earnings from this terminal for FY18.

The potential third regasification plant in Lahad Datu, Sabah, will be the next catalyst for PetGas as Petronas continues to plan ahead for energy supply security.

The PGU pipeline will make PetGas the prime beneficiary of rising gas demand, as additional volumes would have to be transported through the pipeline.

The company has high operating leverage with the PGU system which we understand can transport up to 3,000 million standard cu ft per day (mmscfd), compared with only 2,300 mmscfd of gas sales transported in FY14.

We value PetGas based on the discounted cash flow method (7% weighted average cost of capital [WACC] and 3% TG) because of its stable earnings stream and future upside from new regasification and power plants.

We continue to like PetGas for its promising outlook with resilient earnings, solid balance sheet and strong parentage. Also, PetGas is not affected by the plunge in crude oil prices as it merely provides throughput services.

As for risks, PetGas’ earnings will not be affected by changes to gas prices, and an increase in subsidised gas prices would encourage more gas capital expenditure by Petronas, which would benefit PetGas.

However, the delay or later-than-expected commissioning of new regasfication and power plants will affect PetGas’ growth prospects. — AllianceDBS Research, May 13

This article first appeared in The Edge Financial Daily, on May 14, 2015.