Petronas Gas - SELL - 22 May 2008

Petronas Gas - FY08 results very much expected (Results Note)



Price: RM10.00

Target Price: RM9.70

Recommendation: SELL



· 12MFY08 net profit of RM1,092.9m was in line with expectations at 104% of our earnings estimate of RM1,054.5m and 100% of consensus estimate of RM1,094.3m. Revenue and pretax profit were in-line with expectations but the effective tax rate of 22% was below our 24% forecast due to a one off reversal of RM78.2m in deferred tax liabilities as the corporate tax rate will be reduced by 1% to 25% for YA2009.

· High tax rate adversely impacted earnings. 12MFY08 pre-tax profit grew by 9% YoY due to 115 mmscfd gas delivery to Keppel Energy that commenced in 3QFY08 and the 12% electricity tariff increase but net profit fell by 12% due to sharply higher effective tax rate of 22% (12MFY07: 3%) as almost all its tax allowances were utilised in FY07.

· Margins under pressure too. Despite 4QFY08 revenue of RM799.9m being a record high, 4QFY08 pretax profit of RM335.3m was 3.0% lower QoQ and 8% lower YoY due to higher operating expenses at both the throughput and utilities segment. 4QFY08 net profit of RM300.6m was 19% higher QoQ only due to 10% effective tax rate driven by a one off RM58.2m reversal in deferred tax liabilities in that quarter.

· 50 sen GDPS expected but could have done better. Final GDPS of 20 sen tax exempt and 15 sen less 25% tax plus the interim GDPS of 15 sen less 27% tax total 50 sen GDPS. Having said that, Petronas Gas could have declared higher dividends as its net cash position strengthened to a new high of RM1,253.7m or 63 sen per share.

· No revision in earnings estimates. Maintain RM9.70 target price (utilising 3% terminal growth rate and 10.0% WACC assumptions) and SELL call. At 18x FY09 PER, valuations appear fair for Petronas Gas as a utilities company but its hesitance to pay higher dividends with its huge net cash position gives us pause as to its earnings outlook.







KENANGA INVESTMENT BANK BERHAD (15678-H)