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This article first appeared in The Edge Financial Daily, on March 9, 2016.

 

Petronas_FD_9March16_theedgemarketsPetronas Gas Bhd
(March 8, RM22.48)
Maintain neutral with a higher target price (TP) of RM22.55:
Petronas Gas Bhd’s (PetGas) financial year 2015 (FY15) earnings trailed our estimates to make up 88% of our full-year forecasts. The earnings shortfall was mainly due to higher operating expenses on the back of the ongoing plant rejuvenation and revamp project.

The regasification terminal in Sungai Udang, Melaka, also saw operating expenses increase on a higher depreciation charge, following an adjustment made to its development costs. The weaker results were also attributed to the softer associate contribution, which was inflated in FY14 by the recognition of the deferred tax allowance at its Kimanis power plant, amounting to RM154.5 million.

We revised PetGas’ FY16F (forecast) earnings by -4.5% to factor in the higher operating expenditure (opex) and lower associate contribution, while we kept our FY17F earnings largely unchanged. We also introduce our FY18F earnings forecasts. We now expect FY16F earnings to grow by 7% from 9.6% before easing to 3.5%, and picking up to 8.6% in FY18F to reflect the contribution from the new regasification terminal in Pengerang, Johor.

Despite PetGas’ higher-than-expected opex in FY15, we believe its stable earnings outlook remains largely intact. We like PetGas for its defensive earnings and strong long-term fundamentals, which are backed by the continued industrialisation in Malaysia that should see a rising demand for gas.

In the medium term, PetGas’ earnings growth is expected to be driven by its 65%-owned RM2.7 billion regasification terminal project in Pengerang. Construction of the plant with an annual capacity of 3.5 million tonnes (compared with 3.8 million tonnes at the existing Melaka regasification terminal) is slated for commercial operations by the fourth quarter of 2017.

However, we believe there are limited catalysts for its share price, while the earnings potential from its new regasification plant has been largely priced in. Key earnings risks include missing efficiency targets, which will result in lower performance-based incomes, lower gas transportation volume, and delays in the completion of the Pengerang regasification terminal.

We remain “neutral” on PetGas with a revised TP of RM22.55 from RM22.40 after rolling forward our discounted cash flow valuation for its core operations. Our TP implies a FY16F/FY17F price-earnings ratio of 23.9 times and 23.1 times, respectively. — RHB Research, March 8

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