Petronas Gas - Poised for Lekas take-off

-  We maintain our BUY recommendation on Petronas Gas (PGas), with an unchanged sum-of-parts- (SOP) based fair value of RM21.60/share which implies an FY13F PE of 24x.

-  We maintain PGas’ FY12F-FY14F earnings as its 1HFY12 core net profit of RM692mil (excluding net gains of RM100mil arising from Gas Malaysia’s IPO, which led to a 5% reduction in the group’s equity stake in the latter to 15%) was largely within expectations – accounting for 45% of our FY12 core net profit forecast of RM1,528mil and 42% of street estimates’ RM1,654mil. 

-  The group also declared a single-tier interim dividend of 15 sen/share, equal to the previous financial year and in line with our expectations. Hence, we maintain FY12F-FY14F net profits, which have incorporated contributions from the upcoming Lekas liquefied natural gas (LNG) regassification terminal in Malacca that is expected to commence in September this year. 

-  QoQ, the group’s 2QFY12 turnover slid 3% to RM887mil due to lower exports of propane and butane. But 2QFY12 core net profit rose 8% QoQ to RM359mil largely due to lower operating overheads, absence of asset impairment and reduced repair & maintenance costs. 

-  YoY, the group’s 1HFY12 core net profit rose 6%, driven by higher transportation capacity charges, increased sales of industrial gasses, electricity and steam from the utilities division. This was partly offset by lower profit sharing arising from weaker export volumes for propane & butane.

-  PGas’ earnings are perched at an inflection point with the 530mmscfd Lekas RGT on schedule to commence operations in September this year. While we expect direct contribution of Lekas to add 5% to group earnings, the additional incremental revenue from capacity charge and volume expansion in the peninsula gas utilisation pipeline are projected 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 could be much larger than the over RM2bil Lekas RGT. We estimate that every additional RM1bil in investments could raise PGas’ SOP by 16 sen/share, assuming a project IRR of 9%, equity discount rate of 10% and debt:equity ratio of 80:20.

-  The stock is currently trading at an attractive FY13F PE of 19x – below its 2009 peak of 23x. We expect further newsflow on fresh LNG projects to sustain the stock’s re-rating momentum.  

Source: AmeSecurities