Sector Focus Pet Gas, Gas M’sia to gain from rising gas demand

by **Cals** Fri 04 Oct 2013, 12:57

Sector Focus Pet Gas, Gas M’sia to gain from rising gas demand

Business & Markets 2013

Written by Cynthia Blemin of theedgemalaysia.com

Friday, 04 October 2013 12:28

KUALA LUMPUR (Oct 4): HwangDBS Vickers Research has raised its target price (TP) for two gas players – PETRONAS GAS BHD [] and Gas Malaysia Bhd – due to rising demand for gas.

It has raised TP for Petronas Gas Bhd to RM25.70 and Gas Malaysia Bhd to RM3.95 and has also maintained its “buy” rating on both gas players.

HwangDBS Vickers said, in a note today, Petronas Gas is the biggest beneficiary as the additional gas volume will pass through its Peninsular Gas Utilisation (PGU) pipeline.

Petronas Gas is also the direct proxy for Petronas’s gas capex, it added.

The rising gas demand would also benefit Gas Malaysia as it is the sole gas distributor with an established network, it noted.

“Gas production growth lagged behind demand growth due to low subsidized gas prices… the government is looking at gas subsidy rationalisation following the plan to lower fiscal deficit to 3% by 2015,” it said.

The research house said natural gas, which accounts for 42% of the power-generation fuel mix in Peninsular Malaysia, is sold to the power sector at about 1/3 of market price.

However, it opined that utility players are unaffected by rising gas costs, given the plan to pass on the increments.

Higher electricity and gas tariff rates will affect mainly industrial users. Domestic users with low usage would not see any increase in their electricity bill, it added.

The research house said outlook is promising with Petronas’s plan to invest RM15 billion to find new gas to meet rising demand in Peninsular Malaysia.

“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 O&G capex,” it said.

It noted that its DCF-derived TP is raised to RM25.70/share after adjusting for a higher terminal growth rate.

As for Gas Malaysia, HwangDBS said the gas player has secured additional gas volumes of 40/30/40mmscfd for FY13-15F respectively.

It added that the additional supply provides good earnings visibility to the group, and expects the volume growth to boost FY13-15F net earnings by 9-10% p.a.

“We like Gas Malaysia for its defensive and scalable earnings and high earnings visibility under the regulated pricing mechanism.

“Maintain buy with higher DCF-derived TP of RM3.95/share after imputing higher terminal growth,” it added.

Gas Malaysia is an attractive mid cap play that offers resilient earnings with 4% sustainable yield, supported by its high FCF and strong balance sheet, it said.

“Outlook is promising due to strong gas demand growth and lack of competitive fuels,” it added.