The Edge Billion Ringgit Club 2013 Petronas Gas has bright prospects

by **Cals** Tue 22 Oct 2013, 10:15

The Edge Billion Ringgit Club 2013 Petronas Gas has bright prospects

Business & Markets 2013

Written by Kamarul Anwar of theedgemalaysia.com

Tuesday, 22 October 2013 09:34

PETRONAS Gas Bhd’s (PetGas) share price has more doubled from RM10.60 in early 2008 to around RM23 currently, a boon for its long-term shareholders who have kept faith with the company since its listing in September 1995.

These shareholders were also rewarded with an average dividend of 45 sen per share in 2011 financial year (FY11) and FY12. PetGas’ earnings have been stable and secure, thanks to the lack of competition for gas processors in this country.

Already a pricey stock today for many a common investor, PetGas’ market capitalisation is around RM45.5 billion, based on its closing share price of RM23 yesterday. It’s a double-edged sword for the company, as 12 of the 14 analysts covering the stock have either rated it a “hold” or “sell” due to the expensive valuation.

The company has an impressive earnings track record. For FY12 ended Dec 31, PetGas made RM1.401 billion in net earnings on the back of RM3.58 billion in revenue. For the nine months ended Dec 31, 2011 (9MFY11), it recorded a net profit of RM1.08 billion on revenue of RM2.77 billion.

The company changed its financial year-end to Dec 31 in FY11 from March 31 in FY10, when it made a net profit of RM1.44 billion on revenue of RM3.52 billion.

PetGas’ earnings growth, however, has not reached its full potential given the country’s regulated gas prices despite a rising demand for energy. Currently, users in Malaysia are charged about a third of the international market price for gas.

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Anuar says PetGas expects the newly commissioned Melaka regasification plant to contribute 5% to its FY13 earnings.

Analysts, however, expect things to change soon, due to a cut in subsidies that Prime Minister Datuk Seri Najib Razak has pledged to arrest “deteriorating public finances” which was one of the reasons Fitch Ratings downgraded Malaysia’s sovereign rating.

The prime minister has pledged to reduce the country’s fiscal deficit to 3% of GDP in 2015 from 2012’s 4.78%.

With commodity prices rising and the population increasing, Najib needed to make the unpopular decision to reduce subsidies, as more than half of the government’s budget today is spent on partially paying for consumption needs.

“Chances are very high that gas prices, along with other controlled commodities, are likely to be next in a round of price hikes following the fuel subsidy cut two months ago,” Affin Investment Bank Bhd head of retail research Dr Nazri Khan told The Edge Financial Daily.

He said the projection was made based on the Performance and Management Delivery Unit’s (Pemandu) Subsidy Rationalisation Road Map — which aims to cut subsidies by about RM100 billion from 2010 to 2015.

“We are not sure about the magnitude [of subsidy cuts] but it should be controllable. Say, a 10% reduction within two years and the rollbacks will remain gradual over different phases,” Nazri opined.

In a note to clients dated Oct 4, HwangDBS Vickers Research Sdn Bhd analyst June Ng said PetGas will be the biggest beneficiary if, or when, gas prices are raised.

“Higher gas prices under subsidy rationalisation would encourage higher capital expenditure (capex) from Petroliam Nasional Bhd (Petronas) and Third Party Access (TPA) for liquefied natural gas (LNG) imports.

“PetGas is the biggest beneficiary, as the additional gas volume will pass through its Peninsular Gas Utilisation (PGU) pipeline. It is also the direct proxy for Petronas’ gas capex,” Ng said.

HwangDBS has a “buy” call on PetGas. It also raised the gas processor’s target price by 15.77% to RM25.70.

“We like Petronas Gas for its resilient earnings with no fuel risk, strong parental support, solid balance sheet and promising growth prospects arising from Petronas’ larger oil and gas capex,” HwangDBS’ Ng explained in the note.

She also said PetGas stands to gain a bigger income as the LNG plant in Melaka commenced operations in June.

“Development of new regasification plants and continued gas-related capex by Petronas will be the key rerating catalysts for PetGas,” Ng said.

“PetGas is the front runner for the Pengerang regasification plant under the Refinery and Petrochemical Integrated Development [Rapid] project given its involvement in the Melaka plant, and the Pengerang plant would be connected to the main PGU.”

In May, PetGas chairman Datuk Anuar Ahmad told reporters the firm expects the newly commissioned LNG regasification plant in Sungai Udang, Melaka to contribute 5% to its FY13 earnings.

“The plant was commissioned on April 30, 2013 and we expect to see about 5% contribution for the second half of this financial year, and about 10% contribution yearly,” he was quoted as saying earlier.

The Sungai Udang regasification plant, the first of its kind in Malaysia, has a maximum capacity of 3.8 million tonnes per year. It will enable third-party gas users, such as independent power producers or Tenaga Nasional Bhd (TNB), to import their own natural gas instead of relying solely on Petronas in case the country faces another round of chronic gas supply shortage as in 2012.

In addition, with Petronas already introducing a two-tier pricing mechanism for natural gas, PetGas could enjoy a rise in earnings in the long run when demand for gas grows larger.

Petronas will supply 1,000 million standard cu ft per day at a subsidised rate to TNB. Any additional requirement will be charged the market rate based on a government-approved gas pricing formula.

However for now, analysts tracking PetGas do not seem keen on the stock due to its current valuations. Bloomberg data showed that only two out of 14 analysts rated the company as a “buy”, while the “hold” and “sell” calls were tied at six apiece.

“We maintain our ‘sell’ rating on PetGas as valuations are expensive. While dividends may be stable (FY13/FY14 yield at 3%), we feel there are higher yielders elsewhere that offer similar stability,” said Alliance Research Sdn Bhd analyst Jeremy Goh in a note.

In all likelihood, PetGas may see a rise in its earnings in the near future. Will the long-term shareholders even think of parting with their PetGas shares? Not likely, as the likely jump in the share price and good dividend prospects are too attractive to discard.

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This article first appeared in The Edge Financial Daily, on October 22, 2013.