KDN: PP 10744/06/2012 17 January 2012 Visit Note Petronas Gas Berhad First LNG import in Aug2012 Reiterate BUY Increased Target Price (TP): RM16.50 (from RM15.60) INVESTMENT HIGHLIGHTS We visited Petronas Gas (PGas) Liquefied Natural Gas (LNG) Regasification Facilities which is under construction in the vicinity of Sg. Udang Port, Melaka, last week. It will be the first offshore regasification jetty in the world. We believe this earnings-accretive project will spur buying interest in PGas. The government s commitment in developing the LNG imports industry and PGas eagerness for expansion reaffirms our positive view on PGas future prospectus. On track for completion in Aug12. The LNG re-gasification project is now 70% completed and is on track to commence operation in Aug12. Recall, the construction began in Jan11 and upon the completion, the plant will have a total re-gasifying capacity of 3.8m MT per annum or equivalent to a send-out (natural gas) capacity of about 530m standard cubic feet (mmscf)/day. Malaysia will be the 2 nd country in ASEAN to import LNG after Thailand. Thailand started its first LNG imports May last year. The first LNG re-gasification plant in Singapore is scheduled for completion by 2013. Consists of 3 packages. The LNG Re-gasification Facilities consists of 3 packages with total investment outlay of approximately RM1.6b, of which Package 1 is for two units of Floating Storage Unit (FSUs) costs RM450m; Package 2 An island jetty with regasification unit & sub-sea pipeline valued at RM1.1b; and Package 3 Onshore pipelines worth RM150m. PGas management indicated that the company might have a maximum equity participation of 20% in the FSUs pending finalisation of the negotiation with MISC while the assets in the package 2 & 3 are fully owned (refer Appendix: Equity structure). Shorter construction time for offshore facilities. We understand that the construction period for the abovementioned plant (offshore) is shorter than those built onshore. Given the fact that PGas is only given a timeframe of 18 months to set up the facilities in order to address the gas curtailment issue, offshore plant tends to be a better choice for fulfilling the requirement. For instance, the aforesaid Singapore s LNG plant is expected to take at least 3 year for completion. We learnt that the fabrication of an onshore LNG storage tank will generally take about 18 months. In addition, land acquisition for an onshore site is difficult and time consuming. RETURN STATS Price (16 Jan 2011) Target Price Expected Share Price Return RM15.34 RM16.50 +7.6% Expected Dividend Yield +3.6% Expected Total Return +11.2%* * We are maintaining BUY due to positive sentiment, potential earnings upside and good dividend with net cash position STOCK INFO KLCI 1,509.06 Bursa / Bloomberg Board / Sector Syariah Compliant 6033 / PTG MK Main/ Industrial Yes Issued shares (mil) 1,978.7 Par Value (RM) 1.00 Market cap. (RM m) 30,353.70 Price over NA 3.50x 52-wk price Range RM11.00 RM15.64 Beta (against KLCI) 0.71 3-mth Avg Daily Vol 1.96m 3-mth Avg Daily Value Major Shareholders RM30.05m Petronas 60.60% EPF 12.52% KWAP 5.76% KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION FOR IMPORTANT DISCLOSURES
Will take 5 days for a complete re-gasification cycle. The offshore re-gasification jetty (water depth of 21m- 23m) is mainly designed to cater to Q-Max class (the world largest) LNG carrier, the capacity of which is about 260,000m 3. Note that, the storage capacity of each FSU is 130,000m 3. To offload LNG from Q-Max to both FSUs will take 1 day while another 4 days to re-gasify the total 260,000m 3 LNG. Effectively, the complete cycle for the re-gasification process (referring to Melaka re-gasification plant) is about 5 days. Sources of income to PGas. PGas, being the sole-owner of the re-gasification unit and Peninsular Malaysia s gas pipelines system, is expected to be the main beneficiary. There will be 3 sources of income as a result of its investment in the re-gasification business, which include re-gasification service charges, gas transportation fees and leasing fees of the FSUs. Given the maximum equity participation of only 20% (pending finalisation), we reckon the contribution from the potential leasing income is minimal as compared to the former two. To boost earnings by +10%. Based on the full capacity of 530mmmscf/day, we expect additional profit of RM160m per annum to be generated from the re-gasification business or equivalent to about 10% of FY12F number (refer Table C). We also tabulated the data based on the LNG supply agreement, we estimate that the imports of LNG business can generate additional RM135m-RM315m net profit to PGas in 2013-2015 or equivalent to 8.6%-20.0% higher as compared with the initial forecasts (without imports). We have yet to factor the potential contribution from LNG business venture into our numbers, pending the fee structure for re-gasification service to be disclosed. More re-gasification plants to come. PGas announced on 29 Dec 2011 that it has incorporated three wholly owned subsidiaries, Regas Terminal (Sg. Udang) S/B, Regas Terminal (Pengerang) S/B and Regas Terminal (Lahad Datu) S/B. As such, we reckon that there is high probability of PGas taking part in the proposed regasification plants in Pengerang, Johor and Lahad Datu, Sabah, should the plans materialise. The proposal is still in the early stage of feasibility study and we expect final decision to be known by year-end. Reiterate BUY. We believe PGas is a good proxy play to the evolution of domestic LNG/natural gas sector, leveraging on the liberalization initiatives by the government. We believe PGas should trade above its historical PE mean since 2007 of 18.5x, factoring in positive newsflow and catalysts moving forward. (i) Potential earnings upgrade; (ii) Third party LNG imports; and (iii) Rising natural gas demand namely from the power sector driven by potential electricity exports to Singapore as well as the establishment of new power plants, are postive to PGas. We are reiterating our BUY recommendation for PGas with a higher TP of RM16.50 (from RM15.60), derived from 19.5xPER12 (18.5x previously) which is +0.5-standard deviation above average, plus net cash of RM1 per share (as at 3QCY11). A +10% earnings growth will enhance our TP for PGas by about RM1.60. INVESTMENT STATISTICS FYE Dec FY10 FY11 FY11E^ FY12F Revenue (RM m) 3,221.8 3,525.0 3,689.5 3,758.9 EBIT (RM m) 1,211.8 1,858.5 1,936.0 2,077.3 Pretax Profit (RM m) 1,243.8 1,900.3 1,980.7 2,087.0 Net Profit (RM m) 941.0 1,439.3 1,573.5 1,572.7 EPS (sen) 47.6 72.7 79.5 79.5 EPS (%) 1.4% 53.0% 9.3% -0.1% PER (x) 32.3 21.1 19.3 19.3 Net Dividend (sen) 50.0 50.0 50.0 55.6 Net Dividend (%) 3.3% 3.3% 3.3% 3.6% Source: Company, Forecast by MIDFR ^ changes in financial year end to Dec from Mar previously, annualised figures 2
Table A: Milestone of the LNG Re-gasification Facilities Development Important Date 28-Jun-2010 29-Jun-2010 21-Sep-2010 5-Oct-2010 5-Oct-2010 July-Dec2010 1-Dec-2010 1-Jan-2011 16-Aug-11 29-Sep-11 23-Dec-2011 Events Announcement of LNG Re-gasification Facilities under 10 th Malaysian Plan Letter of Intent (LOI) from Petronas to PGas Submission of application to UPEN Melaka Received approval from Melaka State Government Petronas announced that the facilities will be completed in July2012 Studies & Front End Engineering Design (FEED) Petronas and PGas signed Head of Agreement (HOA) EPCIC works awarded to Ranhill Worley and Muhibbah Engineering Repair, life extension and conversion contracts for FSU awarded to MMHE Fast-track conversion of LNG carrier into FSU contract awarded to Keppel Code of conduct for the provision of Third Party Access (TPA) - Know as PGas Network Code for Peninsular Gas Utilisation Transmission System Jan-2012 4-Jun-2012 June-July2012 Aug-2012 70% of the project was completed PM will officiate the project via satellite at World Gas Conference, KLCC Commissioning Commercially operate Table B: LNG Re-gasification Facilities Overview Location Vicinity of Sungai Udang Port, Melaka Package 1 (P1): 2 floating storage units (FSUs); Facilities Owner/operator Project value Re-gas capacity Construction date Package 2 (P2): An island jetty with re-gasification units & subsea pipelines; Package 3 (P3): Onshore pipelines Petronas Gas, MISC (for FSUs) Est. RM1.6b (P1-RM450m; P2-RM1b; P3-RM150m) 3.8m MT per annum or 530mmscf/day Jan2011 Completion date Aug 2012 Re-gas charges Customers Sources of LNG Yet to be disclosed Petronas, Third Party GDF Suez, Qatargas, Gladstone LNG 3
Table C: Estimated earnings impact on the LNG imports (1) Based on full capacity of 530mmscf/day Based on Payback period (5-10 years) IRR* (12%) Cheniere Energy s TUA** MIDF Model Est. potential earnings RM120m RM240m RM160m RM150m RM167m % upside vs FY12 forecasts +7.6% to +15.3% +10.2% +9.5% +10.6% Note: Based on the Melaka re-gasification facilities full capacity of 530mmscf/day 1mmscf = 1,000 mmbtu * Assuming initial outlay of RM1.2b and timeframe of 20 years ** TUA = Terminal Use Agreement with total fees of USD0.32/mmBtu. Assuming operating margin of 80% (2) Based on the LNG Supply Agreement Import from Amount (p.a.) Period Start Period End 2012F 2013F 2014F 2015F* GDF Suez 2.5m MT/ 121,750 mmscf 3.5 years (starting Aug2012) 2016 139 334 334 334 QatarGas 1.5m MT/ 73,050 mmscf 2013 (assuming starting 2H) 2033-100 200 200 Glastone LNG 3.5m MT/ 170,450 mmscf 2014 (assuming starting 2H) 2034 - - 233 467 Total (mmscf/day) 7.5m MT/ 365,250 mmscf 139 434 767** 1,001** % of feedgas processed in FY11 +6.7% +20.8% +36.9% +48.1% Est. potential earnings (RM m)^ 42 135 241 315 % earnings upside vs initial forecasts +2.7% +8.6% +15.3% +20.0% Note: 1m MT of LNG = 48,700 mmscf of Natural Gas ^ Given the structure of re-gasified charges is yet to be disclosed, our preliminary computation is based on the fees structure of 4 th GPTA. * Assuming the term of GPTA unchanged after expiring in 31 March 2015 ** The re-gasification plant has a maximum send-out gas capacity of 3.8mMT/annum or 530mmscf/day. We assume further capacity expansion will take place. Sources: MIDFR, PGas, various 4
Graph A: PetGas historical average PER (x) 24 22 20 + 1SD: 20.4x 18 16 Average: 18.5x -1SD: 16.6x 14 12 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Sources: Bloomberg, MIDFR DAILY PRICE CHART Belford Chang chang.kz@midf.com.my 03-2772 1650 5
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MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. SELL Negative total return is expected, by -15% or more, over the next 12 months. TRADING SELL Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 10