PetGas, NRG to provide O&M services for Kimanis plant

by **hlk** Tue 05 Jul 2011, 17:53

Petronas Gas Bhd
(July 4, RM13.38)
Maintain outperform at RM13.26 with fair value of RM14.47: Petronas Gas Bhd (PetGas) announced last week that it had entered into a shareholders agreement with NRG Consortium (Sabah) Sdn Bhd to provide operation and maintenance (O&M) services for the 300MW gas-fired power plant in Kimanis, Sabah. NRG is a wholly-owned subsidiary of Innoprise Corp, which is wholly owned by Yayasan Sabah. PetGas will hold a 60% stake in the joint venture.

Recall, PetGas is already in a JV with Yayasan Sabah (with a similar stakeholding) to develop the Kimanis Power Plant. The power plant is expected to capitalise on the availability of the gas from the Sabah Sarawak Integrated Oil and Gas Projects (SSIOGP) which involve the development of offshore fields like the Gumusut/Kakap and Kebabangan. It is targeted to meet the growing demand for electricity in Sabah. We understand that the plant will only be completed by end-2013, and as such the O&M revenue will only impact PetGas later.

Risks to our view include: (i) worse-than-expected impact from lower gas volume processed; (ii) rising costs of operation, including plant maintenance, materials and manpower; and (iii) delays in start-up of the LNG regassification plant and the Kimanis power plant.

Our earnings estimates are maintained at this juncture as impact to financials will only be felt by end-2013.

We continue to like the stock as it will be the beneficiary of any gas-based endeavours by Petroliam Nasional Bhd. We believe such endeavours are likely to be extensive moving forward as the national oil company tries to diversify its reliance on oil in favour of gas. PetGas is already involved in the RM3 billion regassification plant (targeted for operation by FY12) which will receive LNG from external sources, and we believe it will be the front runner for any upcoming projects. Our fair value suggests a potential upside of 9.2%, including the dividend yield of 4.5%. This implies a total upside of 13.7% from the current share price. As such, we maintain our “outperform” call on the stock and RM14.47 fair value based on discounted cash flow. — RHB Research, July 4