C O M P A N Y U P D A T E Wednesday, January 02, 2019 FBMKLCI: 1,690.58 Sector: Power & Utilities THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Petronas Gas Berhad TP: RM16.10 (-16.1%) Lower than Expected 2019 TPA Tariffs Last Traded: RM19.20 SELL Kylie Chan Sze Zan Tel: +603-2167 9601 kyliechan@ta.com.my www.taonline.com.my The News Petronas Gas Bhd (Pet Gas) made a series of announcements, comprising:- 1) Fees for 2 nd term (2019-23) Gas Processing Agreement (GPA), 2) Third Party Access (TPA) tariffs for pilot regulatory period (2019), and 3) Acquisition of lineback and heel assets from Petronas for RM108mn. (A) 2 nd Term GPA Fees 2 nd term GPA tariffs (Figure 1) increased by 8.3% compared to the 1 st term. All other key terms remain status quo (i.e. flow rate charge above committed threshold volumes, performance incentives, internal gas consumption terms). To recap, the 20-year GPA (2014-33) between Petronas (sole offtaker and owner of gas molecules) and its customers is subject to review at the end of each term. We are positive that higher GPA reservation charge will partially cushion earnings contraction from new TPA tariffs. Figure 1: Change in for GPA Tariffs for 2 nd Term Component Fixed Reservation Charge Tariff 1 st Term Fee (2014-18) RM2,330 per mmscf (B) TPA Tariffs for 2019 Pilot Regulatory Period 2 nd Term Fee (2019-23) RM2,524 per mmscf For transportation assets, new IBR tariffs (Figure 2) are lower by 16.4% versus the previous Gas Transportation Agreement (GTA). Given that 2019 Regulated Asset Base (RAB) remains status quo, this implies that the rate of return would be lower (previous: 9.2%). However, the latter was not disclosed by management. Share Information Bloomberg Code PTG MK Stock Code 6033 Listing Main Market Share Cap (mn) 1,978.7 Market Cap (RMmn) 35,419.3 Par Value 1.00 52-wk Hi/Lo (RM) 20.24/15.82 12-mth Avg Daily Vol ('000 shrs) 879.0 Estimated Free Float (%) 25.0 Beta 0.8 Major Shareholders (%) Petronas - 60.7 EPF - 9.7 KWAP - 3.2 Forecast Revision FY18 FY19 Forecast Revision (%) 0.0 (6.0) Net Profit (RM mn) 1,961.2 1,878.0 Consensus 1,917.1 1,916.7 TA's / Consensus (%) 102.3 98.0 Previous Rating Sell (Maintained) Financial Indicators FY18 FY19 Net Debt/Equity (x) 0.0 Net Cash FCFPS (RM) 0.8 1.0 P/CFPS (x) 24.9 19.6 ROE (%) 14.6 13.4 ROA (%) 10.6 9.8 NTA/Share (RM) 6.6 6.9 Price/NTA (x) 2.9 2.8 Share Performance (%) Price Change PTG FBM KLCI 1 mth 0.0 0.2 3 mth 12.7 8.9 6 mth (2.7) 5.5 12 mth (10.6) 10.5 (12-Mth) Share Price relative to the FBMKLCI Meanwhile, for regassification assets, we understand from management tariffs were reduced (from current levels) to reflect lower finalized project cost for Regassification Terminal (RGT) Pengerang. Figure 2: New IBR Tariffs for TPA Assets in 2019 Facilities IBR Tariff Previous Peninsular Gas Utilization (PGU) RM1.072/GJ RM1.248/GJ (GTA Postage Tariff) Regassification Terminal Sg. RM3.518/mmBtu Not available Udang (RGTSU) Regassification Terminal Pengerang (RGTP) USD0.637/mmBtu Not available Source: Bloomberg Page 1 of 5
We are negative on the lower-than-expected FY19 TPA tariffs. We await more clarity from EC and management on upcoming RP1 tariffs in 2020, including disclosure on allowed rate of return. (C) TPA Recap Recall that tariffs for Pet Gas regassification and transmission & distribution businesses are regulated by the Energy Commission (EC). The Incentive Based Regulation (IBR) framework will now apply for both in conjunction with TPA implementation. According to EC guidelines for gas transportation, the 1 st full regulatory period (RP1) will be implemented in 2020-23. The RAB for PGU is currently valued based on Optimized Replacement Costs (ORC). ORC (previously known as Depreciated Replacement Cost) translates to roughly 3x of Historical Cost (HC). To recap, HC was previously known as Net Book Value (NBV). By the end of the 2 nd regulatory period (assuming each period is 3 years), RAB will fully migrate to HC valuation. This implies significant earnings contraction for Pet Gas. Therefore, to partially mitigate this, EC will use a transitional valuation method. Hence, RAB for RP1 and RP2 will be based on weighted average of HC and ORC valuation (Figure 3). Figure 3: Composition of RAB Weightage in RP1 and RP2 Opening Regulated Asset Base HC Weightage ORC Weightage Year 1 0% 100% RP1 Year 2 20% 80% Year 3 40% 60% Year 1 60% 40% RP2 Year 2 80% 20% Year 3 0% 0% (D) Lineback & Heel Assets Pet Gas will purchase the following assets from Petronas for RM108mn:- 1) Linepack for PGU, and 2) Heel for RGTSU and RGTP. Linepack (Figure 4) is the minimum quantity of gas in pipelines, which allows instantaneous offtake of natural gas from the system. It also provides sufficient buffer to cater for fluctuations in gas demand within the PGU system. Meanwhile, heel is the minimum amount of liquefied natural gas (LNG) required in an RGT s storage tank. Heel also allows tank temperatures to be maintained at operational level. To recap, Pet Gas is facility owner of PGU and both RGTs, whilst gas and LNG molecules in both facilities belong to Petronas. Therefore, under TPA Codes, Pet Gas is required to take over the linepack and heel in order to operate the facilities. Page 2 of 5
Figure 4: Typical Cross Section of Storage Tank and Pipeline Source: Company We are neutral on this acquisition as it is fundamental to sustain Pet Gas current operations. Furthermore, the cash outlay is marginal given that Pet Gas current cash pile of RM3.3bn and net cash position. We believe the assets will comprise part of RAB. Impact & Valuation We incorporate the following: 1) higher fixed reservation charge under 2 nd term GPA, 2) new IBR tariffs in 2019, and 3) assumption of annual reduction of IBR tariffs in-line with weighted new RAB valuation. As a result, our forecasts for FY19/20 are reduced by 6%/9%. Correspondingly, our Sum-of-Parts (SoP) valuation, with core operations valued based on DCF, is lowered to RM16.10 (previous: RM18.90). Maintain Sell on Pet Gas as regulatory headwinds linger on, pending full details on RP1 tariffs. Furthermore, there is lack of new catalyst projects to cushion earnings decline from IBR. Page 3 of 5
Earnings Summary Income Statement Balance Sheet FYE 31 Dec (RMmn) 2016 2017 2018E 2019F 2020F FYE 31 Dec (RMmn) 2016 2017 2018E 2019F 2020F Revenue 4,561.3 4,809.6 5,276.0 5,218.7 5,171.9 Fixed assets 12,807.5 12,898.6 13,390.7 13,383.3 13,283.5 EBITDA 2,954.5 3,167.4 3,461.5 3,323.5 3,264.1 Associates & JCEs 736.2 754.4 790.2 839.7 889.6 Depreciation (877.1) (990.1) (1,007.9) (1,007.3) (999.8) Deferred Tax 408.0 364.8 364.8 364.8 364.8 Net finance cost (39.7) (28.6) (61.7) (35.4) (10.4) Others 52.6 201.9 201.9 201.9 201.9 Associates & JVs 63.6 87.8 71.7 99.0 99.8 Non-Current Assets 14,004.3 14,219.7 14,747.6 14,789.8 14,739.8 Exceptionals 5.5 16.2 0.0 0.0 0.0 Pretax profit 2,106.8 2,252.7 2,463.6 2,379.7 2,353.7 Inventories 68.5 66.7 73.5 73.1 72.8 Taxation (370.5) (435.8) (475.5) (475.9) (470.7) Trade and other rcvb 711.9 834.0 900.4 876.3 854.3 MI (2.8) (24.3) (26.9) (25.8) (25.5) Cash and Deposits 1,763.1 2,500.4 2,727.3 3,443.2 4,143.4 Net Profit 1,733.6 1,792.7 1,961.2 1,878.0 1,857.5 Others 5.9 6.8 6.8 6.8 6.8 Core Net Profit 1,728.1 1,776.5 1,961.2 1,878.0 1,857.5 Current Assets 2,549.4 3,407.9 3,708.0 4,399.5 5,077.3 Per Share Data Total Assets 16,553.6 17,627.5 18,455.7 19,189.2 19,817.1 Core EPS (sen) 87.3 89.8 99.1 94.9 93.9 DPS (sen) 62 66 67 65 64 Borrowings 2,216.9 2,978.9 3,056.9 3,152.9 3,152.9 Book Value (RM) 6.0 6.3 6.6 6.9 7.2 Deferred Tax 1,131.0 1,165.6 1,165.6 1,165.6 1,165.6 Net Tang Asset (RM) 6.0 6.3 6.6 6.9 7.2 Others 5.9 5.0 5.0 5.0 5.0 Non-current Liabilities 3,353.8 4,149.5 4,227.4 4,323.4 4,323.4 Ratios FYE 31 Dec 2016 2017 2018E 2019F 2020F Borrowings 32.6 105.3 127.4 131.4 131.4 Valuations Trade & other Payables 1,006.0 610.3 683.9 690.8 698.7 Core PER (x) 22.0 21.4 19.4 20.2 20.5 Others 0.0 0.0 0.0 0.0 0.0 Dividend yield (%) 3.2 3.4 3.5 3.4 3.3 Current Liabilities 1,038.6 715.6 811.3 822.1 830.1 EV/EBITDA (x) 13.1 12.3 11.2 11.5 11.5 P/BV (x) 3.2 3.0 2.9 2.8 2.6 Total Liabilities 4,392.4 4,865.1 5,038.7 5,145.6 5,153.5 P/NTA (x) 3.2 3.0 2.9 2.8 2.6 FCF Yield (%) 2.1 1.2 4.0 5.1 5.2 Share capital 1,978.7 3,165.2 3,165.2 3,165.2 3,165.2 Reserves 9,988.0 9,349.8 9,977.4 10,578.4 11,172.8 Profitability ratios Minority Interests 194.5 247.4 274.3 300.1 325.6 EBITDA margin (%) 64.8 65.9 65.6 63.7 63.1 Equity 12,161.2 12,762.5 13,417.0 14,043.7 14,663.5 EBIT margin (%) 45.5 45.3 46.5 44.4 43.8 PBT margin (%) 46.2 46.8 46.7 45.6 45.5 Total Equity + Liabilities 16,553.6 17,627.5 18,455.7 19,189.2 19,817.1 Core Net margin (%) 37.9 36.9 37.2 36.0 35.9 ROE (%) 14.2 13.9 14.6 13.4 12.7 Cash Flow Statement ROA (%) 10.4 10.1 10.6 9.8 9.4 FYE 31 Dec (RMmn) 2016 2017 2018E 2019F 2020F Pretax profit 2,106.8 2,252.7 2,463.6 2,379.7 2,353.7 Liquidity ratios Depreciation 877.1 990.1 1,007.9 1,007.3 999.8 Current ratio (x) 2.5 4.8 4.6 5.4 6.1 Net Interest 39.7 28.6 61.7 35.4 10.4 Quick ratio (x) 2.4 4.7 4.5 5.3 6.0 Associates & JVs (63.6) (87.8) (71.7) (99.0) (99.8) Working Cap Changes 119.8 (516.0) 0.4 31.4 30.3 Leverage ratios Interest Income 54.2 84.8 95.0 103.6 130.8 Total Debt/ Assets (x) 0.1 0.2 0.2 0.2 0.2 Income Tax Paid (370.5) (435.8) (475.5) (475.9) (470.7) Total Debt/Equity (x) 0.2 0.2 0.2 0.2 0.2 Others (2.5) 616.4 0.0 0.0 0.0 Net Gearing (x) 0.0 0.0 0.0 Net Cash Net Cash CF from Operations 2,761.0 2,933.1 3,081.4 2,982.6 2,954.5 Interest coverage (x) 22.1 19.2 15.7 16.7 16.0 Capex (1,954.6) (1,846.1) (1,500.0) (1,000.0) (900.0) Growth ratios Dividends from Assoc 31.7 53.3 35.9 49.5 49.9 Revenue (%) 2.4 5.4 9.7 (1.1) (0.9) Others (67.2) (102.5) 0.0 0.0 0.0 EBITDA (%) (0.7) 7.2 9.3 (4.0) (1.8) CF from Investing (1,990.1) (1,895.3) (1,464.1) (950.5) (850.1) PBT (%) 4.2 6.9 9.4 (3.4) (1.1) Core Net Profit (%) (21.4) 2.8 10.4 (4.2) (1.1) Dividends (1,187.2) (1,306.0) (1,333.6) (1,277.0) (1,263.1) Core EPS (%) (21.4) 2.8 10.4 (4.2) (1.1) Net Change in debt 1,032.4 1,143.3 100.0 100.0 0.0 Interest Paid (114.2) (158.1) (156.7) (139.1) (141.2) Others 30.0 20.8 0.0 0.0 0.0 CF from Financing (239.0) (299.9) (1,390.4) (1,316.1) (1,404.3) Net Cash Flow 531.9 737.9 226.9 716.0 700.1 Beginning Cash 1,230.8 1,763.1 2,500.4 2,727.3 3,443.2 Ending Cash 1,762.7 2,501.0 2,727.3 3,443.2 4,143.4 Page 4 of 5
(THIS PAGE IS INTENTIONALLY LEFT BLANK) (THIS PAGE IS INTENTIONALLY LEFT BLANK) (THIS PAGE IS INTENTIONALLY LEFT BLAN Stock Recommendation Guideline BUY : Total return within the next 12 months exceeds required rate of return by 5%-point. HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point. SELL : Total return is lower than the required rate of return. Not Rated: The company is not under coverage. The report is for information only. Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return if dividend discount model valuation is used to avoid double counting. Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. As of Wednesday, January 02, 2019, the analyst, Kylie Chan Sze Zan, who prepared this report, has interest in the following securities covered in this report: (a) nil Kaladher Govindan Head of Research TA SECURITIES HOLDINGS BERHAD (14948-M) A Participating Organisation of Bursa Malaysia Securities Berhad Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 2072 1277 Fax: 603 2032 5048 www.ta.com.my Page 5 of 5