Stock Name: PETGAS
Company Name: PETRONAS GAS BHD
Oil and gas sector
Maintain positive: MIDF Research oil and gas sector aggregate earnings growth in 2QCY11 declined 8.9% quarter-on-quarter compared with 1QCY11's -2.9% q-o-q. Negative earnings surprises outweighed the positive (37% below expectation compared with 13% above expectation). Accordingly, our CY11 core aggregate profit forecast has been adjusted downwards by 4.2% mainly as a result of an earnings revision for Petronas Chemicals Group Bhd (PetChem)(-6.5%) and Bumi Armada Bhd (-12.9%). Although 2QCY11 results were a slight disappointment, sector fundamentals remain intact with estimated CY11 and CY12 earnings growth of 14.5% year-on-year and 22% y-o-y.
Petronas Gas Bhd (PetGas) continued to deliver consistent earnings in 2QCY11 despite gas supply constraints. This was attributed to its fixed charges structure and higher utilities sales. We see PetGas as a strong beneficiary from the liberalisation of the gas industry, continuous gas field development and rising natural gas demand. The upcoming LNG re-gasification plant in Melaka by mid next year and recently announced North Malay Basin gas project in the Gulf of Thailand are expected to be the next earnings drivers for PetGas.
Wah Seong Corp Bhd's earnings are expected to be sustained by its Gorgon LNG pipe-coating project. Potential pipecoating contracts for the North Malay Basin gas project and Australia LNG terminals development are also the catalysts for Wah Seong.
The gas supply shortage has affected PetChem's production and consequently its earnings growth, even though margin was still sustained on favourable product price spread. A potential global economic slowdown which might lead to slower demand growth for petrochemical products is another risk. On the bright side, a huge cash pile of about RM10 billion keeps PetChem in an excellent position to expand.
Bumi Armada's sizeable outstanding order book of RM5.8 billion is expected to support earnings growth. However, we believe that the current valuation has already factored in our earnings forecast (including the two new floating, production, storage and offloading (FPSO) contracts (Armada TGT1 and Armada Prima) secured this year, limiting the upside.
Earnings sustainability is the main concern for Malaysia Marine and Heavy Engineering Bhd (MMHE), given its slow job replenishment rate. Its order book as at June 2011 declined to RM2.9 billion from RM5.9 billion a year ago. Delay or failure in securing fabrication jobs namely for Turkmenistan B1 P2 and Malikai projects in CY12 will lead to a downward earnings revision.
The worst performer was KNM Group Bhd, whose share price was badly hit after the weaker results announcement. We do not rule out the possibility of an earnings downgrade should the financial close for its Peterborough project be delayed further. Our current 'buy' call for KNM is based on its strong order backlog of RM3.3 billion, incorporating the earnings recognition from Peterborough project starting FY12.
Our positive stance on the sector is mainly attributed to: (i) earnings growth of 14.5% y-o-y and 22% y-o-y for CY11 and CY12; and (ii) Petroliam Nasional Bhd's capital expenditure and its strategy to focus on domestic exploration and production.
Petronas has spent RM9.6 billion (+60% y-o-y) in 2QCY11. We believe higher Petronas' capex of an average RM60 billion per annum over the next five years (up from earlier announced RM50 billion to RM55 billion) will sustain job replenishment and earnings growth. Potential contracts to be awarded include the Malikai Deepwater project, North Malay Basin project and 14 sanctioned enhanced oil recovery projects. Nonetheless, from a valuation perspective, we are inclined to hold a 'neutral' view with a selective 'buy' recommendation.
Based on our stocks coverage earnings estimates, the sector 2011 price-earnings ratio and 2012 PER are pegged at 21.5 times and 17.7 times, compared with its historical average since 2008 of 18.3 times.
PetGas ('buy', target price: RM14.40) is among the top picks given its defensive business nature, consistent dividend payout with estimated 3.7% net yield and net cash position of RM1.27 per share. PetGas was also an outperformer during the previous stock market downturn. Other 'buy' recommendations include Wah Seong (TP: RM2.73) and Dialog Group Bhd (TP: RM2.94). ' MIDF Research, Sept 8
This article appeared in The Edge Financial Daily, September 9, 2011.
Company Name: PETRONAS GAS BHD
| Research House: MIDF | Price Call: BUY | Target Price: 14.40 |
Oil and gas sector
Maintain positive: MIDF Research oil and gas sector aggregate earnings growth in 2QCY11 declined 8.9% quarter-on-quarter compared with 1QCY11's -2.9% q-o-q. Negative earnings surprises outweighed the positive (37% below expectation compared with 13% above expectation). Accordingly, our CY11 core aggregate profit forecast has been adjusted downwards by 4.2% mainly as a result of an earnings revision for Petronas Chemicals Group Bhd (PetChem)(-6.5%) and Bumi Armada Bhd (-12.9%). Although 2QCY11 results were a slight disappointment, sector fundamentals remain intact with estimated CY11 and CY12 earnings growth of 14.5% year-on-year and 22% y-o-y.
Petronas Gas Bhd (PetGas) continued to deliver consistent earnings in 2QCY11 despite gas supply constraints. This was attributed to its fixed charges structure and higher utilities sales. We see PetGas as a strong beneficiary from the liberalisation of the gas industry, continuous gas field development and rising natural gas demand. The upcoming LNG re-gasification plant in Melaka by mid next year and recently announced North Malay Basin gas project in the Gulf of Thailand are expected to be the next earnings drivers for PetGas.
Wah Seong Corp Bhd's earnings are expected to be sustained by its Gorgon LNG pipe-coating project. Potential pipecoating contracts for the North Malay Basin gas project and Australia LNG terminals development are also the catalysts for Wah Seong.
The gas supply shortage has affected PetChem's production and consequently its earnings growth, even though margin was still sustained on favourable product price spread. A potential global economic slowdown which might lead to slower demand growth for petrochemical products is another risk. On the bright side, a huge cash pile of about RM10 billion keeps PetChem in an excellent position to expand.
Bumi Armada's sizeable outstanding order book of RM5.8 billion is expected to support earnings growth. However, we believe that the current valuation has already factored in our earnings forecast (including the two new floating, production, storage and offloading (FPSO) contracts (Armada TGT1 and Armada Prima) secured this year, limiting the upside.
Earnings sustainability is the main concern for Malaysia Marine and Heavy Engineering Bhd (MMHE), given its slow job replenishment rate. Its order book as at June 2011 declined to RM2.9 billion from RM5.9 billion a year ago. Delay or failure in securing fabrication jobs namely for Turkmenistan B1 P2 and Malikai projects in CY12 will lead to a downward earnings revision.
The worst performer was KNM Group Bhd, whose share price was badly hit after the weaker results announcement. We do not rule out the possibility of an earnings downgrade should the financial close for its Peterborough project be delayed further. Our current 'buy' call for KNM is based on its strong order backlog of RM3.3 billion, incorporating the earnings recognition from Peterborough project starting FY12.
Our positive stance on the sector is mainly attributed to: (i) earnings growth of 14.5% y-o-y and 22% y-o-y for CY11 and CY12; and (ii) Petroliam Nasional Bhd's capital expenditure and its strategy to focus on domestic exploration and production.
Petronas has spent RM9.6 billion (+60% y-o-y) in 2QCY11. We believe higher Petronas' capex of an average RM60 billion per annum over the next five years (up from earlier announced RM50 billion to RM55 billion) will sustain job replenishment and earnings growth. Potential contracts to be awarded include the Malikai Deepwater project, North Malay Basin project and 14 sanctioned enhanced oil recovery projects. Nonetheless, from a valuation perspective, we are inclined to hold a 'neutral' view with a selective 'buy' recommendation.
Based on our stocks coverage earnings estimates, the sector 2011 price-earnings ratio and 2012 PER are pegged at 21.5 times and 17.7 times, compared with its historical average since 2008 of 18.3 times.
PetGas ('buy', target price: RM14.40) is among the top picks given its defensive business nature, consistent dividend payout with estimated 3.7% net yield and net cash position of RM1.27 per share. PetGas was also an outperformer during the previous stock market downturn. Other 'buy' recommendations include Wah Seong (TP: RM2.73) and Dialog Group Bhd (TP: RM2.94). ' MIDF Research, Sept 8
This article appeared in The Edge Financial Daily, September 9, 2011.
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