This article first appeared in The Edge Financial Daily on February 21, 2019
Petronas Gas Bhd
(Feb 20, RM18.20)
Maintain sell with a fair value (FV) of RM15.35: Management did not provide estimates nor guidance for the new gas transportation tariffs under the current pilot structure, which has been effective since the beginning of the year. Petronas Gas Bhd (PetGas) affirmed that the gas transportation segment’s regulated asset base of 2.5 times to three times against a historical book value was generally in line with our estimate of 2.6 times currently. Our return on an asset/ weighted average cost of capital of 8% used in the computation of the transportation base tariff is in line with management’s range of 7% to 9% for Tenaga Nasional Bhd and Gas Malaysia Bhd.
Given that the RM32.92/mmbtu price of local natural gas is still at a 23% discount against Malaysia’s liquefied natural gas export price of RM43/mmbtu (US$10.45/mmbtu) to Japan, Petronas Nasional Bhd (Petronas) will remain the only off-taker for PetGas’ pipeline capacity until the subsidies are removed under the progressive six-month programme. Given Petronas’ utilisation of PetGas’ pipeline of 73% currently, its facilities are able to accommodate third-party suppliers
Management indicated that PetGas aims to provide a sustainable financial year 2018 (FY18) dividend per share (DPS) of 72 sen, which translates to a payout of 79% or 74% based on core earnings against 71% to 73% in FY16 to FY17.
Recall that under the Energy Commission’s new guidelines for the two three-year regulatory periods (RP) starting from Jan 1, 2020 to Dec 31, 2025, the optimised replacement cost valuation being employed to calculate the base tariff currently will be phased out and replaced with historical cost over these transitional periods. Our forecasts have already incorporated the backloaded value erosion from the new gas transportation tariff structure, which translates to a decrease in the gas transportation revenue by 5.6% in FY20F (forecast) under RP1 and 17.9% in FY23F in RP2. The stock currently trades at an FY19F price-earnings ratio (PER) of 19 times, 14% below its three-year average of 22 times. However, these valuations are unjustified given that PetGas’ recurring income and margins will be declining progressively over a prolonged trajectory due to the new gas transportation framework.
We maintain our call on “sell” recommendation for PetGas with unchanged forecasts and sum-of-parts-based FV of RM15.35 per share, which implies an FY19F PER of 16 times. — AmInvestment Bank, Feb 20