PETRONAS GAS BERHAD Analysis Date: (PETGAS) Prepared by: L. C. Chong All figures in thousands of Ringgit Malaysia except per share values and ratios 23/08/2013 Financial Year: 2012 31/12/2012 Latest Quarter: 31/12/2012 Price: 20.08 Stock Category: Investment Grade Overview PETRONAS Gas Berhad primarily engages in the processing and transmission of natural gas in Malaysia. It is involved in the separation of natural gas into its components and the storage, transportation, and distribution of such components. The company s Plant Operations division operates six gas processing plants located in Kertih and Paka in Terengganu, which process natural gas into sales gas and other by products, such as ethane, propane, and butane. Its Transmission Operations division operates peninsular gas utilization pipeline that transmits the sales gas to customers in the power, industrial, and commercial sectors in Peninsular and East Malaysia. The company s Centralised Utility Facilities division supplies a range of industrial utilities including, electricity, steam, and industrial gases, as well as other by products, including liquid oxygen, liquid nitrogen, demineralized water, raw water, cooling water, and boiled feed water to petrochemical businesses in Kertih Integrated Petrochemical Complex in Terengganu. Its Technical and Facilities Development division provides engineering and project management services. The company s LNG Regasification division engages in the engineering, construction, and commissioning of the liquefied natural gas regasification facilities in Malaysia. The company was incorporated in 1983 and is headquartered in Kuala Lumpur, Malaysia. PETRONAS Gas Berhad is a subsidiary of Petroliam Nasional Berhad. Board: Main Board FBMKLCI: YES Industry: INDUSTRIAL PRODUCTS Sub Sector: OIL AND GAS REFINING AND DISTRIBUTION Ownership: Corporate Owned (Local);Government & Politically Linked Investment Strategy Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: Dollar Cost/Value Averaging Portfolio Execution: Buy and Monitor Basis for Buying & Selling: Absolute P/E EPS EY % OSCILLATOR Institutional Sponsorship Market Direction L. C. Chong Page 1 of 13 http://lcchong.wordpress.com
Financial Performance 18% 16% 14% 12% Sustainable Profitability Rating: Very Good Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency ROE 15% 13.81% 13.57% 13.35% 3.00% 18% ROIC 15% 13.11% 12.02% 2.75% 20.57% 88% Although ROIC is not up to my expectation, PETGAS s ROIC has been increasing for many years. 10% 8% 6% 4% 2% 0% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 ROE 11% 10% 12% 14% 16% 14% 12% 12% 13% 15% ROIC 2% 2% 3% 4% 6% 7% 6% 12% 14% 13% Earnings Growth Quality Rating: Very Good 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 0.332 0.324 0.416 0.358 0.63 0.552 0.469 0.476 0.546 0.71 0.8 0.7 0.6 0.5 0.4 0.3 Result YoY % 3 Y % 5 Y % 10 Y % Consistency Revenue 29.35% 5.23% 0.58% 4.85% 77% EPS 30.04% 19.99% 6.55% 7.18% 70% Revenue and EPS are riding higher in uptrend. Based on the annual report, revenue stability is derived from fixed reservation fee via its throughput business. Reservation fee made up 45% of revenue in FY11. Transition from 3GPTA to 4GPTA resulted in a 40% reservation fee reduction. This was more than compensated via removal of internal gas consumption charges, now supplied free by PETRONAS resulting in significant margin expansion. 1,000,000 0.2 500,000 0.1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 PAR Adjusted EPS Revenue Linear (PAR Adjusted EPS) Linear (Revenue) 0 L. C. Chong Page 2 of 13 http://lcchong.wordpress.com
20% 15% 10% 5% 0% 5% Healthy Cash Flow 60 40 20 0 20 40 60 80 Rating: Very Good Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency CROIC 15% 2.79% 4.84% 1.05% 0.52% 29% CCC 37.18 23.79 122.68% 57.53% 19% The huge drop in cash flow ratios is mainly contributed by high capex in funding regastification terminals in Lahad Datu and Pengerang. I am not worry about the drop as long as the company spends the money wisely. Under normal circumstances, PETGAS is able to deliver more than 15% ROIC. I found very high Days Payable Outstanding: 138 days. The historical records shows PETGAS maintained DPO at 39 days in average. The increase in AP by RM472.6 million (105.6%) was in line with increase in capital expenditure to support the growth projects. I think no big issue. 10% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 CROIC 14% 12% 15% 16% 16% 18% 15% 17% 6% 5% CCC 23 15 9 13 16 47 48 27 8 79 100 2,500,000 2,000,000 1,500,000 1,000,000 500,000 Cash Flow Growth Quality Rating: Average Result YoY 3 Y 5 Y 10 Y Consistency Ops. Cash 37.13% 14.63% 5.82% 1.93% 38% Owner Earnings 100.00% 602.56% 249.18% 66.57% 4% As mentioned before, high capex in funding regastification terminals in Lahad Datu and Pengerang decrease free cash flow level of PETGAS. 0 500,000 1,000,000 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net Ops. Cash Owner Earnings Linear (Net Ops. Cash ) Linear ( Owner Earnings) L. C. Chong Page 3 of 13 http://lcchong.wordpress.com
70% 60% 50% 40% 30% 20% 10% 0% 10% Sustainable Competitive Advantage Rating: Excellent Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency NPM 10% 37.34% 36.14% 14.83% 5.96% 13% FCF/Sales 5% 5.82% 10.71% 2.50% 1.28% 71% PETGAS is the solely national oil company in Malaysia. Over 30% Net Profit Margin shows that PETGAS enjoy very huge cost advantage. If not because of regasification terminals, PETGAS should be able to maintain extreme high value for FCF/Sales. 20% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 NPM 29% 29% 36% 34% 42% 35% 27% 29% 39% 39% FCF/Sales 56% 48% 57% 46% 45% 45% 33% 37% 18% 14% Conservative Debt Rating: Excellent 1200% 1000% 800% 600% 400% 200% 0% 200% 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 DCR 56% 66% 114% 169% 297% 308% 248% 276% 113% 23% Debt/Equity 60.72% 51.09% 41.93% 33.34% 25.13% 23.62% 22.75% 22.67% 24.32% 45.02% Quick R. 154% 53% 136% 217% 759% 729% 1072% 1111% 505% 181% Measure 3 Y Avg. 5 Y Avg. 3 Y % 5 Y % Consistency DCR 150% 75.36% 105.75% 13.10% 6.84% 1% Debt/Eqty. < 34.36% 32.58% 34.30% 13.57% 37% 100% Quick R. 100% 456.50% 535.66% 90.77% 35.41% 24% In 2012, the increase in borrowings was attributable to issuance of Sukuk Series 1 based on the principles of Istisna and Ijarah term fi nancing of RM860.0 million by KPSB and fi nance lease liabilities of RM798.7 million assumed by RGTSU in relation to the charter hire of two fl oating storage units at LNG Regasifi cation Terminal in Sg. Udang, Melaka. I am not worry about this. Anyway, under normal situation, PETGAS maintain very conservative debt. L. C. Chong Page 4 of 13 http://lcchong.wordpress.com
Economic Moats Cost Advantage PETGAS is the solely national oil company in Malaysia. Over 30% Net Profit Margin shows that PETGAS enjoy very huge cost advantage. If not because of regasification terminals, PETGAS should be able to maintain extreme high value for FCF/Sales. Switching Costs We can purchase fuel from Shell, BP, Petron, etc in Malaysia, but these suppliers getting oil supplies from PETRONAS. Like it or not, we can t escape from using PETRONAS in Malaysia. Network Effect Not available or no moat found Intangible Assets Efficient Scale In Malaysia, PETGAS monopolizes the exploration and distribution of oil. Shell, Mobil, BP and others have production sharing contract with Petronas. Reference: http://lcchong.files.wordpress.com/2013/07/cp v30 n2 9.pdf L. C. Chong Page 5 of 13 http://lcchong.wordpress.com
Market Timing Discounted Cash Flows Valuation 3 Y 5 Y 10 Y Good 10% Base 6% Bad 2% Ugly 2% Good 10% Base 6% Bad 2% Ugly 2% Good 10% Base 6% Bad 2% Ugly 2% Fair Value 2.84 2.50 2.18 1.88 3.01 2.53 2.10 1.73 3.25 2.54 1.96 1.48 Buy Under 2.09 1.83 1.60 1.38 2.21 1.86 1.54 1.27 2.39 1.87 1.44 1.09 Actual M.O.S. 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% Refer Appendix 1 Growth rate applied in Reverse DCF to reach the current stock price (20.08): 12% Refer Appendix 2 EY% Valuation EPS QoQ Growth EY% High EY% Low Buffer R4Q EPS FY13 EPS* FY14 EPS* Jun 12 Sep 12 Dec 12 Mar 13 Jun 13 QoQ % 5.50% 4.29% 10% 0.97 0.77 0.87 0.232 0.161 0.149 0.182 0.478 105.91% Fair Value 22.61 18.03 20.22 Refer Appendix 3 Insider Trading Refer Appendix 4 Buy Under Sell Above (blank) # Securities Price (blank) 0 0.00 Grand Total 0 0.00 18.02 14.37 16.12 21.99 17.54 19.67 Comments Refer Appendix 5 For the time being, I won t use DCF valuation for PETGAS because PETGAS is very cash hungry now. As for huge EPS QoQ growth (105%), the net profit had increased as the group registered deferred tax assets of RM591.6 million due to investment tax allowance for the LNG regasification terminal in Melaka. I will not take this into considera on as this is not an opera onal profit. I will monitor this counter very closely. I wish to accumulate this stock whenever possible. L. C. Chong Page 6 of 13 http://lcchong.wordpress.com
Notes Created Date Details Type Source Type 23/08/2013 Petronas Gas said net profit had increased as the group registered deferred tax assets of RM591.6 million due to investment tax allowance for the LNG regasification terminal in Melaka. The firm said revenue had risen on "regasification revenue and higher gas transporta on revenue and performance based structure income". Analysis Newspaper http://www.theedgemalaysia.com/index.php?option=com_content&task=view&id=251314&itemid=79 08/07/2013 Petronas sees successful delivery of Gumusut Kakap semi FPS offshore Sabah http://valueinvestorresearchklse.blogspot.com/2013/07/petronas sees successful delivery of.html 06/06/2013 h p://www.theedgemalaysia.com/index.php?itemid=79&id=241065&op on=com_content&task=view Malaysia s Petronas sees flat earnings in 2013 17/05/2013 Petronas Gas Bhd has commi ed to alloca ng a capital expenditure (capex) of RM8.1 billion for the... http://www.theedgemalaysia.com/index.php?itemid=79&id=239131&option=com_content&task=view Growth Driver Outlook;Risk Growth Driver Newspaper Newspaper Newspaper 14/05/2013 Throughput operations lead growth. PGas gas processing activities reported a 4% YoY contraction in revenue (to MYR390m) due to: (i) lower export volume for propane and (ii) softer ASP for propane and butane, but gross profit grew 14% YoY (to MYR222m) driven by lower depreciation expenses. Its gas transportation segment reported a 4% YoY rise in both revenue (to MYR288m) and gross profit (to MYR229m) driven by higher transportation capacity bookings. Growth Driver Analyst Report 08/05/2013 PETGAS is overvalued. I won t add position for the time being. Note 08/05/2013 In my opinion, DCF analysis may not suitable for PETGAS because every year PETGAS has to contribute cash to fund Note development of country. It doesn t keep much cash. L. C. Chong Page 7 of 13 http://lcchong.wordpress.com
Appendix 1 Discounted Cash Flows Valuation Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.19% 3.44% 10.63% 1.03 1.06 11.66% 35% 2% 20% 24% 27% 6% Growth Estimation Financial Figures 7 61 75 21 57 Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr10E) Shares Out. FCF Type 2012 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 20% 1978.73 Owner 485.79 1,319.71 0.00 0% 6% Earnings Projection of Future Free Cash Flow (Base Line 6%) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 514.94 545.83 578.58 592.73 622.96 654.73 688.12 668.94 696.23 724.64 DPV 5,487.59 5,209.61 4,945.71 4,537.73 4,271.29 4,020.49 3,784.42 3,294.85 3,071.28 2,862.89 PV 4,629.06 4,788.90 4,940.63 4,914.01 5,006.53 5,093.61 5,175.59 4,962.92 4,997.47 5,029.67 Fair Value Buy Under (M.O.S. 27%) M.O.S. on Cur. Price (20.08) 3 Y 5 Y 10 Y 2.50 2.53 2.54 1.83 1.86 1.87 0% 0% 0% L. C. Chong Page 8 of 13 http://lcchong.wordpress.com
Projection of Future Free Cash Flow (Good Scenario 10%) 10% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 534.37 587.80 646.58 673.23 730.46 792.55 859.91 822.28 878.19 937.91 DPV 5,694.67 5,610.21 5,526.99 5,154.03 5,008.34 4,866.77 4,729.20 4,050.11 3,873.96 3,705.48 PV 4,853.55 5,240.56 5,621.84 5,682.03 5,957.24 6,224.68 6,484.55 6,145.84 6,295.26 6,438.18 Fair Value Buy Under (M.O.S. 27%) M.O.S. on Cur. Price (20.08) 3 Y 5 Y 10 Y 2.84 3.01 3.25 2.09 2.21 2.39 0% 0% 0% Projection of Future Free Cash Flow (Bad Scenario 2%) 2% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 495.50 505.41 515.52 519.67 528.51 537.49 546.63 541.23 548.59 556.05 DPV 5,280.52 4,823.85 4,406.68 3,978.43 3,623.68 3,300.56 3,006.26 2,665.81 2,419.99 2,196.84 PV 4,404.58 4,353.32 4,306.48 4,212.58 4,162.37 4,116.64 4,074.98 3,958.57 3,916.12 3,877.59 Fair Value Buy Under (M.O.S. 27%) M.O.S. on Cur. Price (20.08) 3 Y 5 Y 10 Y 2.18 2.10 1.96 1.60 1.54 1.44 0% 0% 0% Projection of Future Free Cash Flow (Ugly Scenario 2%) 2% 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FV 476.07 466.55 457.22 453.59 445.88 438.30 430.85 435.38 429.46 423.62 DPV 5,073.44 4,452.93 3,908.31 3,472.50 3,057.12 2,691.43 2,369.49 2,144.48 1,894.49 1,673.64 PV 4,180.10 3,933.82 3,717.66 3,573.68 3,415.22 3,275.72 3,152.91 3,108.12 3,017.35 2,937.15 Fair Value Buy Under (M.O.S. 27%) M.O.S. on Cur. Price (20.08) 3 Y 5 Y 10 Y 1.88 1.73 1.48 1.38 1.27 1.09 0% 0% 0% L. C. Chong Page 9 of 13 http://lcchong.wordpress.com
Appendix 2 Reverse Discounted Cash Flows Discount Rate Margin of Safety Average risk premium Average Risk free rate Unadjusted Discount % Business Risk Factor Financial Risk Factor Discount % Initial RRR Dividend Yield Est. EPS Growth Unadjusted MOS Risk Based MOS 7.19% 3.44% 10.63% 1.03 1.06 11.66% 35% 2% 6% 24% 27% Growth Estimation Financial Figures 7 61 75 21 57 Owner Earnings GR. Terminal % Decay Rate (Yr4E Yr7E) Extra Decay (Yr8E Yr10E) Shares Out. FCF Type 2012 Owner Earnings Excess Cash Intangibles Assets Intangibles% add to DCF 8% 3% 15% 20% 1978.73 Owner 485.79 1319.71 0.00 0% 12% Earnings Projection of Future Free Cash Flow (GR. 12%) 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Yearly GR. FV 544.08 609.37 682.50 716.43 789.51 870.04 958.78 909.87 984.12 1,064.42 DPV 5,798.21 5,816.07 5,833.98 5,484.72 5,413.19 5,342.59 5,272.92 4,481.57 4,341.25 4,205.31 PV 4,965.79 5,472.43 5,980.63 6,092.31 6,475.70 6,854.10 7,227.57 6,812.86 7,037.37 7,254.85 3 Y 5 Y 10 Y Shares Outstanding 1978.73 Fair Value 3.02 3.27 3.67 Desired M.O.S. 27% Buy Under 2.22 2.40 2.69 Current Price 20.08 Actual M.O.S. 0% 0% 0% L. C. Chong Page 10 of 13 http://lcchong.wordpress.com
Appenfix 3 EY% Valuation EY% High EY% Low Buffer R4Q EPS FY13 EPS* FY14 EPS* 5.50% 4.29% 10% 0.97 0.77 0.87 Fair Value 22.61 18.03 20.22 Buy Under 18.02 14.37 16.12 Sell Above 21.99 17.54 19.67 * Estimations from Reuters or local analysts' reports EY% Price High R4Q FY13 FY14 Low Green Zone EY% 5.50% Green Zone Price($) 17.62 14.05 15.76 5.38% Buy Under 18.02 14.37 16.12 10% Trading Range 1.21% 4.41% Sell Above 21.99 17.54 19.67 10% Red Zone EY% 4.29% Red Zone Price($) 22.61 18.03 20.22 Low High L. C. Chong Page 11 of 13 http://lcchong.wordpress.com
Appendix 4 Insider Trading Last 3 months or last 30 insider transactions Transaction Date Securities Holder Type of transaction No of securities Price Transacted L. C. Chong Page 12 of 13 http://lcchong.wordpress.com
Appendix 5 Market Timing Buy Signal No. Method Description 1 EPS QoQ Growth The current quarter's EPS is up more than 15% from the same quarter the year before. 2 DCF Intrinsic Value Price is below Intrinsic Value 3EY % Oscillator Price is below or around the price derived from EY% High 4 Market Direction Stock price breaks out of consolidation/dip on an uptrend. 5 Institutional sponsorship Company owner/directors, EPF, Khazanah, PNB and major fund institutions heavily buying Sell Signal No. Method Description 1 EPS QoQ Growth Quarterly EPS drop for 3 consecutive months. 2 DCF Intrinsic Value Has the stock risen too far from its intrinsic value? 3 Market Direction Long term trend changed from bullish to bearish 4 Institutional sponsorship Company owner, EPF, Khazanah and PNB heavily selling. 5EY % Oscillator Price is above or around the price derived from EY% Low 6 Fundamental Analysis Fundamental of business turns unattractive or bad Declining cash flow Serial charges Serial acquirers The CFO or Auditors leave the company The bills aren t being paid Changes in credit terms and account receivable Found a better opportunity to replace this stock L. C. Chong Page 13 of 13 http://lcchong.wordpress.com