Higher FY20 earnings expected for Petronas Gas

Petronas Gas Bhd
(Jan 17, RM16.50)
Maintain market perform with a higher target price (TP) of RM17.60:The announcement of regulatory period 1 (RP1) at the end of last year which took us by surprise saw the base tariff rate for peninsular gas utilisation (PGU) rising 5.3% to RM1.129 per gigajoule (GJ) for 2020-2022 from RM1.072/GJ in 2019 while base tariffs for the Melaka regasification terminal (RGT) and Pengerang RGT were also raised 3.6% and 39.1% respectively.

We gathered that the higher tariffs are mainly to cover additional costs, such as internal gas consumption (IGC) for both gas transportation (GT) and the RGT, previously borne by parent company Petroliam Nasional Bhd while the significant jump in Pengerang RGT’s tariff is largely due to the inclusion of jetty facility in its regulated asset base (RAB).

While there is no disclosure of return rate for RAB, we understand Petronas Gas Bhd’s (PetGas) return of rate for RP1 is higher than Tenaga Nasional Bhd’s (outperform; TP: RM14.30) RP1 of 7.5% and Gas Malaysia Bhd’s (outperform; TP: RM3) RP1 of 7.3%-7.5%, at the higher range of 7%.

Nonetheless, PetGas expects to see operating profit for GT to drop 8%-10% in RP1 as opposed to the IGC which is now absorbed by shippers like PetGas and Gas Malaysia, is part of the operating costs. This implies an estimated effective tariff cut of 5.8% to RM1.009/GJ against our previous assumption of a 15.1% cut to RM0.091/GJ.

Nonetheless, the overall RGT’s operating profit is set to rise by 3%-5% as the higher contribution from the inclusion of Pengerang jetty more than offset the IGC for both Melaka RGT and Pengerang RGT. Based on the operating profit guidance, we expect the base tariff rate for PGU to decline to RM1.0450/GJ in RP2 (2023 to 2025) and drop further to RM1.000/GJ in RP3 (2026 to 2028) given the RAB’s valuation method that gradually migrates to net book value from optimised replacement cost (or depreciated replacement cost) from 2020 to 2025.

As such, this implies the PGU’s base tariff is expected to fall by 20% from the pre-RP of RM1.248/GJ in 2018 to RM1.000/GJ in 2026.

Given the effective base tariff rate cut is better than expected as the return rate for RAB is higher than what we had expected at 7.5% in RP1, we raise financial year 2020 (FY20) earnings estimate by 16% while the net dividend per share forecast is also upgraded proportionally based on an unchanged earnings payout assumption of 70%.

There is no change in FY19 estimates as it is not affected by RP1. Meanwhile, our sum-of-parts valuation for PetGas is also upped to RM17.60 per share from RM15.75 per share based on the abovementioned assumption for PGU over RP1 to RP3 and beyond while we have assumed that there is no change in the RGT’s base tariff from RP1.

The share price jumped immediately by 6% on the RP1’s announcement at end-December to reflect the impact fully. On a positive note, the official announcement of RP1, albeit not a full disclosure, at least offers earnings clarity.

Given the price to perfection, we maintain our “market perform” call but with a higher TP of RM17.60 from RM15.75, backed by a decent net yield of 4%. An upside risk to our call is its higher-than-expected earnings. —Kenanga Research,Jan 17