This article first appeared in The Edge Financial Daily, on November 3, 2015.

Petronas Gas Bhd
(Nov 2, RM22.90)
Downgrade to underperform with an unchanged target price of RM21.99: The company’s results in the third quarter ended Sept 30, 2015 (3QFY15) came within expectations, bringing its nine months ended Sept 30, 2015 (9MFY15) core net profit to RM1.4 billion.

Its 3QFY15 core earnings grew 5% quarter-on-quarter (q-o-q) to RM472.5 million from RM451.8 million on the back of a 5% hike in revenue. This was driven by an earnings recovery in its utilities segment, which saw its operating profit being doubled to RM42.5 million from RM21.5 million as higher offtake by clients boosted the segment’s revenue by 18% to RM256.8 million from RM217.5 million. While gas processing (GP) earnings normalised to RM172.7 million from RM199.6 million previously, gas transportation (GT) posted flattish earnings. Earnings from regasification (RGT) improved RM6.3 million or 9% q-o-q. On the other hand, associates and joint ventures’ incomes improved significantly to RM23.5 million from RM3.3 million last year.

Year-on-year, 3QFY15 core income rose 9% from RM435.1 million, while revenue inched up slightly by 1%. GT posted a 2% hike in operating profit, despite flattish top line, led by lower operating costs, while RGT’s earnings rose 6% on the back of a 8% jump in revenue due to higher storage fees. However, both GP and utilities saw their operating profits fall 3% and 6% respectively, due to higher plant maintenance costs.

Year to date, 9MFY15 core earnings rose 9% to RM1.4 billion from RM1.29 billion, while revenue inched up 1% to RM3.32 billion from RM3.28 billion. GP reported operating profit grew 9% as revenue rose 3%, on lower operating costs, while GT’s earnings expanded 3% on the back of a 3% hike in revenue as business volume increased. However, both utilities and RGT reported lower earnings by 19% and 2% respectively, as the former faced lower offtake, while the latter incurred higher maintenance costs. A 15 sen third interim net dividend per share (NDPS) was declared for 3QFY15, (ex-date: Nov 18; payment date: Dec 14), bringing 9MFY15 NDPS to 43 sen.

With the Lahad Datu RGT already called off, the refinery and petrochemical integrated development project’s RGT in Pengerang is the only earnings catalysts for Petronas Gas, which will commence in 4QFY17.

Unlike its two other sister companies, namely Petronas Chemicals Group Bhd and Petronas Dagangan Bhd, Petronas Gas is least affected by crude oil price movements and earnings are mainly determined by business volumes of gas processing and transportation, while utilities may be the only business segment likely to be affected by oil prices.

Thus, there are no changes in our FY15 to FY16 estimates for now. Petronas Gas’ share price has risen 11% from its recent low in end-August. It is now ahead of its valuation. Its risks include a delay in the commencement of Pengerang RGT. — Kenanga Research, Nov 2