PetGas down on earnings risk

The subsidiary of Petroliam Nasional Bhd (Petronas), which slid 52 sen to RM18.36, also emerged as the fourth biggest loser on Bursa Malaysia yesterday.

PETALING JAYA: Petronas Gas Bhd’s (PetGas) share price dipped by 2.75% due to concerns over potential earnings risk from 2019 onwards.

The subsidiary of Petroliam Nasional Bhd (Petronas), which slid 52 sen to RM18.36, also emerged as the fourth biggest loser on Bursa Malaysia yesterday.

Analysts are generally mixed on PetGas’ prospects next year, as a possible revision to the Third Party Access (TPA) system may erode the company’s earnings.

Simply put, the new system, which came into force on Jan 16, aims to liberalise the Malaysian gas market by enabling any party to have access to and utilise the domestic gas facilities.

In its note, CIMB Research said the implementation of the TPA would affect PetGas’ regasification and transportation division.

This is largely due to the fact that Petronas is currently the sole customer of PetGas’ gas transportation and regasification assets.

“PetGas is in continuous discussion with the Energy Commission on the framework and quantum of the tariff beyond 2018.

“No impact on 2018 earnings but we see earnings risk in 2019 as the tariff under the TPA may be lowered in the next review,” said the research firm.

CIMB Research added that PetGas would continue to enjoy a rate of return of 9% until end-2018 under the current tariffs for the utilisation of the Peninsular Gas Utilisation System and the regasification terminals in Sungai Udang and Pengerang.

However, as other companies subject to the incentive-based regulation are only allowed to earn 7.5% to 8% return on capital, CIMB Research expects PetGas’ rate of return to be lowered from the current 9%.

The research house has retained its “hold” call on PetGas with an unchanged target price of RM19.40.

Meanwhile, Kenanga Research said the new TPA system is not a threat to PetGas’ financials.

“In our view, TPA is also not an earnings deterrent to PetGas, given that the company is purely a transporter and processer and is not involved in gas supply.

“In any case, the TPA will only affect its parent company Petronas and Gas Malaysia Bhd,” it said.

Post-2018, Kenanga Research expects the new tariff structure to be earnings neutral to PetGas, similar to its view since early last year.

It expects the Government to protect PetGas’ earnings certainty, being a subsidiary of Petronas.

“Based on experience of imbalance cost past-through and gas cost pass-through mechanisms, Tenaga Nasional Bhd and Gas Malaysia Bhd suffered no negative impact with fuel and gas costs passed-through to end-users eventually.

“As such, the new tariff post-2018 could turn out neutral for PetGas,” said Kenanga Research.

The research firm has maintained its “outperform” recommendation and a target price of RM22.

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