While the market is concerned over the poor demand for the highly-priced RasGas long-term LNG (R-Gas), we think the current weakness in PLNG’s share price is an opportunity to accumulate for two reasons: 1) a sharp earnings growth (we expect 37%/54% growth in FY17/18F) driven by capacity expansion (fully contracted) cannot be ignored; and 2) the R-Gas contract could be renegotiated, ending the current crisis and leading to early volume recovery.
With 10 cargos in Q1FY15, the 10% annual downward flexibility is already nearly exhausted. The continued deferral of R-Gas volumes will be a trigger for early negotiations, and an early agreement will be a key trigger for the stock, in our view. While the stock performance may remain muted in the near-term on current market concerns, Petronet LNG remains a compelling growth story.
We believe in the new low oil/gas price era, the R-Gas pricing formula is not sustainable. The R-Gas price would remain much higher than alternate LNG imports for the next 2-3 years.
We assume R-Gas volume deferral of 20% each in FY16F/17F, and assume lower Dahej utilisation at 90-92% (versus past 4-year average of 102%). Our near term earnings reduce sharply (36% for FY16f and 24% of FY17f), but the outlook on long-term earnings growth remains unchanged. While we expect flat earnings in FY16F, we expect earnings to nearly double/treble in 3/5 years. Our price target is unchanged and we reiterate buy rating.
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