CIMB Re­search sees lower earn­ings for Petronas Gas

Lower tar­iffs, change in val­u­a­tion of as­sets to weigh on com­pany

The Star Malaysia - StarBiz - - News -

PETALING JATA: Petronas Gas Bhd’s earn­ings for fi­nan­cial years 2019-2020 (FY19-20) are ex­pected to come in lower due to lower gas trans­porta­tion tar­iffs and a grad­ual change in as­set-based val­u­a­tion, says CIMB Eq­ui­ties Re­search.

The re­search house said it had re­vised its tar­get price to RM18.42, based on 20 times FY20 fore­cast 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 its 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 the short­fall/up­side from these se­ries of de­vel­op­ments, but said that it would dis­close more in­for­ma­tion in Fe­bru­ary in con­junc­tion with its Q4’18 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.

The fixed reser­va­tion charge has been re­vised to RM2,524 per mil­lion stan­dard cu­bic feet per day (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 FY19 fore­cast 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 roll over our val­u­a­tion to FY20, and 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 five-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 in its re­port.

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