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Maintain Neutral with a higher target price of RM22.55
Petronas Gas Bhd
PGas’ operating expenses are expected to remain elevated in
FY16 amidst its ongoing plant rejuvenation and revamp (PRR) project. We mildly
tweaked our FY16F earnings by -4.5% while keeping our FY17F earnings largely
unchanged. Maintain NEUTRAL with a new TP of MYR22.55 (from MYR22.40, 0%
upside) as we roll valuations forward. It is investing in a new MYR2.7bn
regasification terminal at the Pengerang Deep Water Terminal, which would
significantly boost FY18F earnings upon commissioning. However, this has been
largely priced in.
Despite Petronas Gas’ (PGas) higher-than-expected opex in FY15, we believe its
stable earnings outlook remains largely intact. We like PGas 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. 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. We
remain NEUTRAL on PGas with a revised TP of MYR22.55 (from MYR22.40) after
rolling forward our DCF valuation for the core operations. Our TP implies an
FY16F/17F P/Es of 23.9x and 23.1x respectively.
We revised PGas’ FY16F earnings by -4.5% to factor in the higher 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,
regasification the next growth driver. In the medium term, PGas’ earnings
growth is expected to be driven by its 65%-owned MYR2.7bn regasification
terminal project in Pengerang. Construction of the plant with an annual
capacity of 3.5m tonnes (compared to 3.8m tonnes at the existing Melaka
regasification terminal) is slated for commercial operations by 4Q17.
Key earnings risks.
These include: i) missing efficiency targets, resulting in lower
performance-based incomes, ii) lower gas transportation volume, and iii) delays
in the completion of the Pengerang regasification terminal.
FY15 results wrap up.
PGas’ 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 PRR 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 MYR154.5m.