Petronas Gas Bhd
(Aug 6, RM22.10)
Maintain hold, increase target price (TP) to RM24.93 from RM24.45. Petronas Gas Bhd (PGB) management indicated that the RM407.4 million deferred tax assets (DTA) arising from the investment tax allowance granted for the plant rejuvenation and revamp project that was recognised in the second quarter of financial year 2015 (2QFY15) is a one-off item.

There is no further major tax incentives (apart from the tax exemption for the utilities segment).

We also understand that the sharp drop in associate and joint venture (JV) income in 2QFY15 (RM3.3 million versus RM23.8 million in 1QFY15 was mainly due to Kimanis, which was negatively impacted by an unrealised loss from the revaluation of long-term forex contracts.

Their utilities segment was also impacted by a plant shutdown. The 1.7% year-on-year (y-o-y) contraction in 2QFY15 revenue was mostly due to lower sales booked by utilities. The segment’s sales fell by RM26.1 million compared with 2QFY15.

Apart from the impact of lower electricity tariff, the segment was negatively impacted by plant shutdowns, resulting in lower off-take of industrial gases.

Management indicated that it is just regular planned maintenance shutdowns. No further maintenance shutdowns are planned in the second half (2HFY15). Management expects utilities sales to play catch-up in the remainder of the year.

PGB’s throughput services also benefited from the higher base income. In 1HFY15, the gas processing revenue rose 4.3%, thanks to higher capacity reservation fee under the new gas processing agreement, which came into effect on April 1, 2014.

We understand that the group also managed to achieve the overall equipment effectiveness target for two months in 2QFY15, resulting in it being able to claim the PBS incentives.

Coupled with lower cost, gross profit of this segment rose 14.5% y-o-y in 1HFY15.

Meanwhile, the gas transportation segment booked a 4% y-o-y increase in 1HFY15 revenue, benefiting from higher capacity booking under the new gas transportation agreement. The incremental revenue added RM19 million to the group’s gross profit.

FY15 earnings estimate upgraded 22% after imputing the RM407.4 million DTA recognised in 2QFY15.

FY16 and FY17 earnings forecasts were upgraded 0.9% and 1.2% respectively, to take into account the better- than-expected contribution from the gas transportation segment.

With the improved cash flow on the back of a lower tax burden, the FY15 dividend estimate adjusted higher to 65 sen per share (59% payout ratio). We have also rolled forward the valuation base year to FY16 and upgraded our discounted cash flow-based TP to RM24.93 (RM24.45 previously). Maintain hold recommendation on PGB. At this juncture, we do not see any significant rerating catalyst for the stock. — TA Securities, Aug 6

This article first appeared in digitaledge Daily, on August 7, 2015.