Stock Name: PETGAS
Company Name: PETRONAS GAS BHD
Research House: OSK
Petronas Gas Bhd
(April 1, RM9.85)
Maintain buy at RM9.80 with target price raised to RM13.81: Our contrarian view was proven correct as Petronas Gas announced better conditions for the last term of its Gas Processing and Transmission Agreement (GPTA). Fixed revenue will be lower but this will be offset by higher variable revenue linked to the volume of gas processed and transported.
The terms now call for a clear demarcation between processing and transportation fees. While the fixed portion of processing fees is down by 40% due to new transportation fees, the variable volume related portion of fees is up four-fold. The net effect is that revenues are forecast to drop by only 1% under the new terms.
While revenue may be largely unchanged, Petronas Gas' costs will come down significantly as the company will no longer need to pay for the amount of gas it consumes as part of the processing business as long as the consumption level is within agreed operating parameters.
In fact, it may even earn an incentive if it can bring down the amount of gas consumed to a certain level. We believe Petronas Gas will be able to avoid paying for its gas but has not built in any incentives. Earnings before interest, tax, depreciation and amortisation (Ebitda) is therefore forecast to rise by 23% under the new terms.
As we maintain our other forecasts, including volume processed and associates income, Petronas Gas' bottom line will get a 35% boost in FY11 and 38% for FY12. This raises our discounted cash flow-based (DCF) fair value to RM13.81. We also maintain our dividend payout ratio while our dividend per share (DPS) forecast is raised to 65 sen, or a 6.6% yield in FY11.
With the gas cost element removed, Petronas Gas is no longer exposed to rising gas costs as subsidies are removed. The increase in variable volume related revenue also ties the company's revenue closer to performance where we see more upside if Petronas Gas can deliver.
We see no risk of a derating due to the upcoming listing of large Petronas subsidiaries but instead view Petronas Gas as a solid dividend play boosted by the new and more favourable GPTA.
Given the big jump in net profit forecast, our DCF-based fair value is raised from RM10.99 to RM13.81, thus giving an upside of 26%, which means Petronas Gas is a definite buy.
Other than the raised dividend yield forecast of 6.6% for FY11, the company now faces lower risk of hikes in its gas prices as subsidies are withdrawn.
There will of course always be detractors who can point out that the new favourable terms will only last until 2015 but we believe that by then, Petronas Gas will have expanded its business model into power generation and other utilities while still maintaining its role in gas transportation. - OSK Research, April 1
This article appeared in The Edge Financial Daily, April 2, 2010.
Company Name: PETRONAS GAS BHD
Research House: OSK
Petronas Gas Bhd
(April 1, RM9.85)
Maintain buy at RM9.80 with target price raised to RM13.81: Our contrarian view was proven correct as Petronas Gas announced better conditions for the last term of its Gas Processing and Transmission Agreement (GPTA). Fixed revenue will be lower but this will be offset by higher variable revenue linked to the volume of gas processed and transported.
The terms now call for a clear demarcation between processing and transportation fees. While the fixed portion of processing fees is down by 40% due to new transportation fees, the variable volume related portion of fees is up four-fold. The net effect is that revenues are forecast to drop by only 1% under the new terms.
While revenue may be largely unchanged, Petronas Gas' costs will come down significantly as the company will no longer need to pay for the amount of gas it consumes as part of the processing business as long as the consumption level is within agreed operating parameters.
In fact, it may even earn an incentive if it can bring down the amount of gas consumed to a certain level. We believe Petronas Gas will be able to avoid paying for its gas but has not built in any incentives. Earnings before interest, tax, depreciation and amortisation (Ebitda) is therefore forecast to rise by 23% under the new terms.
As we maintain our other forecasts, including volume processed and associates income, Petronas Gas' bottom line will get a 35% boost in FY11 and 38% for FY12. This raises our discounted cash flow-based (DCF) fair value to RM13.81. We also maintain our dividend payout ratio while our dividend per share (DPS) forecast is raised to 65 sen, or a 6.6% yield in FY11.
With the gas cost element removed, Petronas Gas is no longer exposed to rising gas costs as subsidies are removed. The increase in variable volume related revenue also ties the company's revenue closer to performance where we see more upside if Petronas Gas can deliver.
We see no risk of a derating due to the upcoming listing of large Petronas subsidiaries but instead view Petronas Gas as a solid dividend play boosted by the new and more favourable GPTA.
Given the big jump in net profit forecast, our DCF-based fair value is raised from RM10.99 to RM13.81, thus giving an upside of 26%, which means Petronas Gas is a definite buy.
Other than the raised dividend yield forecast of 6.6% for FY11, the company now faces lower risk of hikes in its gas prices as subsidies are withdrawn.
There will of course always be detractors who can point out that the new favourable terms will only last until 2015 but we believe that by then, Petronas Gas will have expanded its business model into power generation and other utilities while still maintaining its role in gas transportation. - OSK Research, April 1
This article appeared in The Edge Financial Daily, April 2, 2010.
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