CIMB Research sees lower earnings for Petronas Gas

CIMB Equities Research expects Petronas Gas

KUALA LUMPUR: CIMB Equities Research expects Petronas Gas’ FY19-20F earnings could be lower due to lower gas transportation tariffs and a gradual change in asset base valuation.

The research house said on Thursday it had revised its target price to RM18.42, based on 20 times FY20F price-to-earnings (P/E), a 10% discount (from 20% discount previously) to its five-year historical mean P/E.

CIMB Research hosted Petronas Gas’ management in our Malaysia Corporate Day last week, during which it met about 50 fund managers and buy-side analysts. 

Generally, investors were concerned about the potential impact of the recently-announced incentive-based regulation (IBR) tariffs on Petronas Gas’s earnings outlook. 

The company declined to quantify theshortfall/upside from these series of developments, but said that it would disclose more information in February in conjunction with its 4Q18 results announcement.

Petronas Gas guided that under the revised terms of the gas processing agreement (GPA) for the period 2019 to 2023, the 8% increase in fixed reservation charge and better terms in performance-based structure (PBS) could raise the gas processing division’s revenue. 

To recap, the fixed reservation charge has been revised to RM2,524 per mmscf vs. RM2,330/mmscf in the first term GPA. This could contribute an additional 2% to Petronas Gas’s earnings, according to CIMB Research’s analysis.

The 14% tariff reduction (RM1.072/GJ vs. RM1.248/GJ previously) for the gas transportation division during the pilot regulatory period over January-December 2019 could drag down Petronas Gas’s net profit by 5%, in our estimation. 

“We also gather the IBR tariff for Regasification Terminal Sg Udang (RTSU) at RM3.518/mmBtu is similar to its previous rate, while IBR tariff for Regasification Terminal Pengerang (RGTP) of US$0.637/mmBtu is slightly lower due to cost savings.

“We cut our FY19F EPS by 1.5% to factor in weaker contributions from gas transportation and regasification segments, partially offset by the stronger numbers from gas processing and upcoming air separation unit (ASU) plant. 

“We also cut our FY20F EPS by 11.2% to factor in the gradual migration in asset base valuation from depreciation replacement cost (DRC) to book value under regulatory period 1 (RP1, 2020-2022).

“Our target price is revised to RM18.42, as we: (i) roll over our valuation to FY20F, (ii) base it on 20x FY20F P/E, a 10% discount (from 20% discount previously as some of the earnings risks have been priced into our forecasts) to its 5-year historical mean P/E. The 10% discount is to factor in risks from a further step-down in IBR tariffs arising from regulated asset return adjustment for the upcoming RP1. Maintain Hold,” it said.
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