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PP 7767/09/2010(025354)

1 April 2010

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

New s Upda te
1 April 2010
MARKET DATELINE

Petronas Gas Share Price


Fair Value
:
:
RM9.80
RM9.72
New Throughput Agreement Recom : Underperform
(Maintained)

Table 1 : Investment Statistics (PETGAS; Code: 6033) Bloomberg: PTG MK


Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/CF P/NTA Gearing ROE GDY

Mar (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (x) (%) (%)
2009a 3,415.1 928.0 46.9 (15.1) 20.9 - 12.4 3.0 Net cash 11.4 5.1
2010f 3,297.1 923.6 46.7 (0.5) 21.0 49.0 12.6 3.0 Net cash 11.1 5.1
2011f 3,046.1 1,076.8 54.4 16.6 18.0 54.0 11.4 3.0 Net cash 12.7 5.9
2012f 3,080.3 1,108.0 56.0 2.9 17.5 55.0 11.3 3.1 Net cash 12.7 6.1
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ New Gas Processing And Transmission Agreement for FY03/2010- Issued Capital (m shares) 1,978.7
2014. Petronas Gas (P Gas) announced that that the negotiations Market Cap(RMm) 19,391.6
Daily Trading Vol (m shs) 0.8
♦ with its parent company, Petronas, on the revised terms of the gas
52wk Price Range (RM) 9.20-10.40
processing and transmission agreement (GPTA) has been concluded. The
Major Shareholders: (%)
revised terms of its GPTA shall be effective from 1 April 2010 to 31 March Petronas 60.6
2014. KWAP 14.9
EPF 12.1
♦ Lower RC and FC offset by new CRC and zero IGC. We believe the
lower Reservation Charge (RC) and Flowrate Charge (FC) is compensated FYE Mar FY10 FY11 FY12
by the new Capacity Reservation Charge (CRC) as well as zero cost of gas EPS chg (%) - (1.1) (1.7)
used for internal consumption (IGC). Assuming FY11-13 total gas Var to Cons (%) (4.7) 0.8 1.8
processed of around 1.02-1.05bn scf, we estimate CRC for P Gas of around
PE Band Chart
RM890-920m. Based on our sensitivity analysis, the revised terms will
lower P Gas’ throughput revenue by 8.6-9.6% on gas processed volume
above 2bnscfd (see Table 3).
PER = 23x

♦ Key concern is on gas output. We believe upside to throughput


PER
PER
=
=
21x
19x
revenues (i.e. from flow rate charges) would likely be capped given that: PER = 17x

1) supply curtailment from “rich” fields in Peninsular Malaysia is likely to


persist (given most of the fields are quite old); 2) JDA gas supply is capped
at 390mmscfd under Phase 1 of the production sharing contract; and 3)
lower flowrate charges (due to lower GHV). Relative Performance To FBM KLCI

♦ Risks. 1) Rising costs of operation, including plant maintenance, materials FBM KLCI
and manpower; and 2) Deferred returns from investments in the Sabah
IPP, and potentially in overseas pipeline businesses.
Petronas Gas
♦ Forecasts. We have revised down our FY11-12 earnings estimates by
1.1% and 1.7% respectively after factoring in the above changes.
Moreover, we highlight that upside to earnings arising from higher
throughput would likely be capped by the supply curtailment from “rich”
fields in Peninsular Malaysia.

♦ Investment case. Accordingly, our fair value is nudged down slightly to


RM9.72/share (vs. RM10.08/share previously). Meantime, notwithstanding
lower throughput processing fees for its domestic operation, we believe
Petronas Gas still offers relatively secure earnings, guaranteed by the
Reservation Charge, and this will also underpin dividend payouts.
Therefore, we believe annual dividend yields of 5-6% p.a. will likely
continue to support the share price. However, given that share price has Wong Chin Wai
(603) 92802158
run ahead of fundamental and lack of earnings catalysts over the medium
wong.chin.wai@rhb.com.my
term, we are maintaining our Underperform call on the stock.

Please read important disclosures at the end of this report.

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♦ New Gas Processing And Transmission Agreement for FY03/2010-2014. Petronas Gas (P Gas)
announced that that the negotiations with its parent company, Petronas, on the revised terms of the gas
processing and transmission agreement (GPTA) has been concluded. The revised terms of its GPTA shall be
effective from 1 April 2010 to 31 March 2014.

Table 2. Revised and Previous GPTA


Revised Previous
Peninsular Malaysia operations:
a. Reservation Charge - RM1.242bn p.a. (RM103.5m per - RM2.064bn p.a. (RM172m per month)
month)
b. Flow Rate Charge based on the following:
i. Feedgas >2.1bscfd ≤ 2.4bscfd - RM0.22/Gj - RM1.57/Gj
ii. Feedgas > 2.4bscfd - RM0.22/Gj - RM0.58/Gj
c. Performance Based Structure: - Profit-sharing formula (30% margin - Profit-sharing formula (30% margin of
i. Propane production above 140MT/hr of Petronas’ propane and butane Petronas’ propane and butane export
ii. Butane production above 100MT/hr export sales) sales)
iii. Meeting customers requirement for Ethane - RM43.47 per metric tonne - RM2m per month
d. Capacity Reservation Charge
(based on Transportation Tariff and Shipper’s
Maximum Daily Quantity)
i) Zone 1 (East) - RM0.543/Gj
ii) Zone 2 (Southern) - RM1.434/Gj
iii) Zone 3 (Central) - RM1.793/Gj
iv) Zone 4 (North) - RM0.931/Gj

Miri operations:
- Fixed rate - RM1.89/mmbtu - RM1.82/mmbtu
Bintulu operations:
- Fixed reservation charge - RM0.655m p.a. RM0.63m p.a.
- Flowrate charge - RM1.17/mmbtu RM1.12/mmbtu
Internal Gas Consumption (IGC) - No cost if Petronas Gas operates Petronas Gas will pay for IGC
below the agreed operating
parameter. Petronas Gas only pay for
IGC if operates above the operating
parameter.
Source: Company

♦ Key amendments to the new GPTA are.

1) Lower Reservation Charge (RC) from RM172m per month to RM103.5m per month;

2) Flowrate Charge (FC). Gas volume processed above 2.1 billion square cubic feet per day (bscfd) will have
lower FC rate of RM0.22/Gj (vs. RM1.57/Gj for gas volume processed above 2.1bscfd and up to 2.4bscfd and
RM0.58/Gj for gas volume processed above 2.4bscfd previously);

3) Capacity Reservation Charge (CRC) which will be based on the Transportation Tariff determined by location
of Petronas’ customers;

4) Miri operations: Higher FC rate of RM1.89/mmbtu (+3.8%) for gas delivered to Petronas’ customers;

5) Bintulu operations: Higher fixed RC of RM0.655m p.a. (+4.0%) and higher FC of RM1.17/mmbtu (+4.5%)
for gas delivered to Petronas’ customers

6) Revenue contribution from ethane based on RM43.47 per metric tonne (vs. RM2m per month previously), if
Petronas Gas meets the requirements.

7) P Gas will need not pay for internal gas consumption (IGC) if it is below the agreed operating parameters.

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♦ Lower RC and FC offset by new CRC and zero IGC. We believe the lower RC and FC is compensated by the
new CRC as well as zero gas cost for internal consumption. Assuming FY11-13 total gas processed of around
1.02-1.05bn scf, we estimate CRC for P Gas of around RM890-920m. We have now factored into our profit
model the following assumptions: 1) Reservation Charge of RM103.5m per month (vs. RM172m per month
previously); 2) Flowrate Charge of RM0.22/Gj (vs. RM1.57/Gj for gas volume processed above 2.1bscfd and up
to 2.4bscfd and RM0.58/Gj for gas volume processed above 2.4bscfd previously); 3) new Capacity Reservation
Charge; and 4) lower fuel cost.

♦ Sensitivity analysis. Based on our sensitivity analysis, the revised terms will lower P Gas’ throughput revenue
by 8.6-9.6% on gas processed volume above 2bnscfd (see Table 3).

Table 3. Impact Of New Terms On P Gas Revenue


New Terms Old Terms Change Change
(RMm) (RMm) RMm (%)
1) at 2,000mscf
RC 1,242 2,064 -822 (39.9)
FC1 - - - -
FC2 - - - -
CRC 635 - - -
Total Revenue 1,877 2,064 -187 (9.1)

2) at 2,200mscf
RC 1,242 2,064 -822 (39.9)
FC1 7 52 -45 (86.5)
FC2 - - - -
CRC 699 - - -
Total Revenue 1,934 2,116 -182 (8.6)

3) at 2,500mscf
RC 1,242 2,064 -822 (39.9)
FC1 28 208 -180 (86.5)
FC2 7 19 -9 (47.4)
CRC 794 - - -
Total Revenue 2,071 2,291 -220 (9.6)
Source: RHBRI

♦ Key concern is on gas output. We understand that gas output for Peninsular Malaysia consumption has
reached near maximum under Petronas PSC’s existing offshore facilities (given delay in E&P spending) as well as
under the agreement with Thailand’s PTT for sharing of gas from the Joint Development Area (JDA). We believe
upside to throughput revenues (i.e. from flow rate charges) would likely be capped given that: 1) supply
curtailment from “rich” fields in Peninsular Malaysia is likely to persist (given most of the fields are quite old); 2)
JDA gas supply is capped at 390mmscfd under Phase 1 of the production sharing contract; and 3) lower flowrate
charges (due to lower GHV).

Risks

♦ Risk issues for Petronas Gas. Looking ahead, we see the following issues for Petronas Gas:

o Gas supply is expected to remain a priority for the power industry, especially given benchmark thermal coal
prices are hovering at still-high levels of US$95/tonne (vs. US$110/tonne in Oct-08). Even after the
Government raised the gas price to RM14.31/mmbtu, from RM6.40, the power industry will likely continue
to rely on gas to generate base load electricity.

o Rising costs of operation, including plant maintenance, materials and manpower. The company had already
previously warned that operating cost will rise.

♦ Mitigating factors. Earnings are guaranteed by the Reservation Charge of RM103.5m per month as well as
Capacity Reservation Charge stipulated under the GPTA.

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Forecasts And Valuations

♦ Forecasts cut. We have revised down our FY11-12 earnings estimates by 1.1% and 1.7% respectively after
factoring in the above changes. Moreover, we highlight that upside to earnings arising from higher throughput
would likely be capped by the supply curtailment from “rich” fields in Peninsular Malaysia. Note that our
forecasts currently have not factored in the Kimanis IPP as it will only be operational in 2011.

♦ Investment case. Accordingly, our fair value is nudged down slightly to RM9.72/share (vs. RM10.08/share
previously). Meantime, notwithstanding lower throughput processing fees for its domestic operation, we believe
Petronas Gas still offers relatively secured earnings, guaranteed by the Reservation Charge, and this will also
underpin dividend payouts. Therefore, we believe annual dividend yields of 6% p.a. will likely continue to
support the share price. However, given that share price has run ahead of fundamental and lack of earnings
catalysts over the medium term, we are maintaining our Underperform call on the stock.

Table 4. Earnings Forecasts Table 5. Forecast Assumptions


FYE Mar (RMm) FY09 FY10F FY11F FY12F FYE Mar FY10F FY11F FY12F
Throughput services 2,658.0 2,469.4 2,224.8 2,246.6 Res. Charge (RMm/mth) 172.0 103.5 103.5
Utilities 757.2 687.7 711.3 743.7 Flowrate 1 (RM/mmscfd) 1.57 0.22 0.22
Others - 140.0 110.0 90.0 Flowrate 2 (RM/mmscfd) 0.58 0.22 0.22
Turnover 3,415.2 3,297.1 3,046.1 3,080.3 Annual vol. (bn scf) 1.00 1.02 1.04
Growth (%) 9.3% -3.5% -7.6% 1.1%

EBITDA 1,940.9 1,941.9 1,942.9 1,943.9 Source: Company data, RHBRI estimates
Margins (%) 56.8% 58.9% 63.8% 63.1%
Depreciation (634.3) (643.3) (652.3) (661.3)
Net interest exp (14.4) (13.4) (12.4) (11.4)
Associate 55.5 49.6 67.0 71.5
Pre-tax profit 1,231.5 1,230.7 1,431.6 1,472.2
Taxation (303.4) (307.1) (354.8) (364.2)
Eff. tax rate (%) 24.6% 25.0% 24.8% 24.7%
Net profit 928.0 923.6 1,076.8 1,108.0

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law.
The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may
differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein
in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated
persons may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or
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“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

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Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

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