This article first appeared in The Edge Financial Daily, on May 11, 2016.

Petronas Gas Bhd
(May 10, RM21.30)
Upgrade to market perform with a lower target price (TP) of RM21.95: Petronas Gas Bhd (PetGas) is proving to be a consistent performer with the fifth consecutive quarters of in-line results. Its first financial quarter ended March 31, 2016 (1QFY16) results showed a broad-based quarter-on-quarter (q-o-q) improvement, thanks to lower operating expenditure (opex) as the preceding quarter was hit by higher opex on plant repair and maintenance. With Pengerang regasification (RGT) only coming into the system by end-FY17, earnings growth is limited. However, with share price correcting 7% in the past three months coupled with a decent yield of 3%, we upgrade PetGas to “market perform” with a new TP of RM21.95/sum-of-parts (SoP) share.

PetGas’ 1QFY16 results came in within expectations with a net profit of RM447.2 million, accounting for 25%/24% of house/street’s FY16 full-year estimates. A first interim net dividend per share of 14 sen was declared in 1QFY16 (ex-date: May 23, payment date: June 8), which was lower than the 17 sen paid in 4QFY15, but similar to what was declared in 1QFY15.

Despite 1QFY16 revenue dipping 1% to RM1.13 billion, core earnings jumped 19% q-o-q to RM447.2 million, largely due to lower operating cost as the preceding quarter was slammed with a higher opex on plant repair and maintenance. The decline in revenue was led by decline in gas transportation (GT) by 1% on lower booking capacity due to the shortened working month in February, and a lower RGT revenue on lower storage fees as the US dollar weakened against the ringgit. Overall, gas processing (GP) earnings soared 66%, 15% for GT and 210% for utilities. However, the share of profit from joint ventures (JV) plunged 57% to RM10.5 million from RM24.6 million previously.

PetGas’ 1QFY16 net profit declined 7% year-on-year from RM479.1 million although revenue grew 3%, which was due to the higher depreciation for GP, lower share of profit from JVs and higher taxation. In addition, GT and RGT earnings were impacted by higher repair and maintenance costs. About 4% of GP was attributed to the higher performance-based structure income, and 5% in RGT due to higher storage fees as the US dollar strengthened against the ringgit.

With the Lahad Datu RGT already called off, the refinery and petrochemical integrated development RGT in Pengerang is the only earnings catalyst for PetGas, which will commence in 4QFY17. Compared with its two other sister companies, namely Petronas Chemicals Group Bhd and Petronas Dagangan Bhd, PetGas is the least affected by crude oil price movements and earnings are mainly determined by business volumes of GP and GT, while utilities may be the only business segment likely to be affected by oil prices.

While keeping our forecast unchanged, we are rolling over our valuation base year to calendar year 2017 to derive a new TP of RM21.95/SoP share from RM21.99/SoP share previously. With its share price falling 7% in the past three months coupled with a decent yield of 3%, we are upgrading the stock to “market perform” from “underperform” previously. Risk to our call is a delay in the commencement of Pengerang RGT. — Kenanga Research, May 10