Unchanged tariffs under TPA seen as a positive for Petronas Gas

This article first appeared in The Edge Financial Daily, on January 17, 2018.
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Petronas Gas Bhd
(Jan 16, RM18.36)
Retain hold with an unchanged target price of RM19.40:
Petronas Gas Bhd (PetGas) announced that the Third Party Access (TPA) system was to be implemented starting yesterday. The announcement also stated that the Energy Commission had confirmed that the current tariffs for the utilisation of the Peninsular Gas Utilisation system, Regasification Terminal Sungai Udang and Regasification Terminal Pengerang would be maintained until end-2018.

The implementation of the TPA will affect PetGas’ regasification and transportation division. Petroliam Nasional Bhd (Petronas) is currently the sole customer of PetGas’ gas transportation and regasification assets. Currently, depreciated replacement cost (DRC) is used as the asset value in PetGas’ existing contracts with Petronas (not book value), while the rate of return allowed is 9%.

The current gas transportation tariff is RM1.248 per gigajoule in Peninsular Malaysia while the current tariff for regasification is not disclosed. With tariffs unchanged until end-2018, we believe that this indicates that PetGas will still enjoy a rate of return of 9% based on DRC and there should not be any impact on its financial year 2018 (FY18) earnings. While the unchanged tariffs under the TPA is positive to PetGas, in our view, we see earnings risk beyond 2018 if there is any tariff revision under the TPA.

We retain our “hold” call on the stock, with an unchanged TP of RM19.40, based on 17.8 times FY19 forecast price-earnings ratio (PER) (20% discount to historical five-year mean PER; the 20% discount is the midpoint of possible earnings downside in our best- and worst-case scenarios). — CIMB Research, Jan 15