PetGas free cash flow sufficient to sustain PE valuation

In 2019, the group introduced two new services including the gassing up and cooling down for liquefied natural gas (LNG) carriers and reloading services.

PETALING JAYA: Petronas Gas Bhd’s (PetGas) strong free cash flow generation of RM1.5bil per year will be sufficient to sustain its current price-to-earnings valuation.

Affin Hwang Capital said in a report PetGas has no issue sustaining its historical payout of 80% of total earnings per share, which translates into decent dividend yield of 4.5%.

“Current price-to-earnings valuation at 18-times seems fair, trading near its long-term 15-year average.”

The research house said it is tweaking its earnings forecasts slightly by 2% for 2020 to 2022 on some “minor housekeeping, ” namely one 1% lower effective tax rate and adjustment in interest income and finance costs.

“No changes to our target price of RM17 (being a minor two sen adjustment, despite the 2% tweak in earnings). The recent first-quarter 2020 results have provided clearer earnings visibility, alleviating the previous concern over the changes in regulated asset base framework.”

Separately, Affin Hwang Capital said PetGas has plans to further branch out to provide more ancillary services.

“In 2019, the group introduced two new services including the gassing up and cooling down for liquefied natural gas (LNG) carriers and reloading services, both at RGT Pengerang. In 2020, the service will be extended to LNG bunkering services at RGT Sungai Udang and LNG truckloading services at RGT Pengerang.

“PTG has also invested in a nitrogen plant in Kertih which is expected to commence operations in 2021. We gather that the engineering, procurement, construction and commissioning contract has been awarded to contractors with a contract sum of RM150mil.”

Affin Hwang Capital said PetGas operates 2,623km of pipeline in Peninsular Malaysia with a total capacity of 3,500 million standard cubic feet per day, 80% higher than the processing capacity.

“Under the current transportation tariff, PetGas will progressively migrate its valuation for its RAB from the depreciation replacement cost (DRC) method to net book value (NBV) in calculating its allowable return.

“The asset-base calculation will remain at 100% DRC in 2020, and will effectively take five years to fully convert to NBV (20% reduction in DRC to NBV every year).”

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