Petronas Gas - Faster earnings growth from Lekas and Kimanis BUY

- We maintain our BUY recommendation on Petronas Gas (PGas) but with a raised discounted cash flow (DCF)-based fair value of RM21.60/share from an earlier RM17.62/share.

- Our higher DCF stems from: (1) lowering PGas’ cost of equity to 9% (from 10% earlier) based on a 5-year beta of 0.64 instead of a 2-year beta of 0.82 previously, (2) 50% increase in estimated capex for the Lekas regassification terminal (RGT) from RM1.2bil to RM1.8bil, and (3) 30% increase in the group’s 20% stake in Gas Malaysia based on its current market price.

- The higher contributions from Lekas RGT has slightly raised FY12F-FY14F net profit. But we have further raised FY14F net profit by 9% by incorporating maiden contributions from the 60%-owned 300MW Kimanis power plant, which is expected to be completed by end-FY13F. 

- PGas’ earnings are perched on an inflection point with the 530mmscfd Lekas RGT on schedule to commence operations in September this year. While the direct earnings contribution of Lekas will be small, we expect the additional incremental revenue from capacity charge and volume expansion in the peninsula gas utilisation pipeline to accelerate FY13F earnings by 15%.

- Besides Lekas, PGas is also involved in the RM1bil Lahad Datu regassification terminal to supply gas to the Tenaga’s power plant by 2015. Additionally, the RM60bil Refinery and Petrochemicals Integrated Development (RAPID) in Pengerang, Johor includes a power generation capacity of 1,200MW and a RGT project which is much larger than the over RM2bil Lekas RGT.

- While still premature to provide any estimates in earnings contribution to the group for any future RGT or power projects at this juncture besides Lekas and Kimanis,  we estimate that every additional RM1bil in investments could raise PGas’ SOP by 16 sen, assuming a project IRR of 9%, equity discount rate of 10% and debt:equity ratio of 80:20.

- We remain positive on PGas due to:-  (1)Global shift from nuclear to natural gas for power

generation;  (2)Government’s strategy to gradually remove natural gas subsidies by 2015, which will lead to a more viable pricing mechanism for electricity generation; and (3)  Multiple domestic RGT and power projects. 

- The stock is currently trading at an attractive FY13F PE of 20x – below its 2009 peak of 23x. We expect further news flow on fresh LNG projects to sustain the stock’s re-rating momentum.

Source: AmeSecurities