Buy Petronet LNG with a target price of R280 per share. Our target implies 2.9x FY17 P/B/ and 17x FY17 EPS; we build 20% EPS CAGR over FY15-FY18. The Kochi terminal (50% of gross assets, capacity of 5 mmtpa) remains underutilised due to pipeline
connectivity issues to end markets. The Kerala Government has been taking some concrete steps on land acquisition though the work has not really started. The terminal generated PBT losses of ~R400 crore in FY15. Likely resolution here could significantly improve return ratios (to 25-30% versus 15% currently) and earnings for the company, driving a re-rating.
Petronet LNG remains the most credible play on India’s growing appetite for LNG. Whilst its low-cost infrastructure, back-to back contracts, strategic asset locations, and unregulated regasification margins are its long-terms comparative advantages, in the near term following catalysts/factors will support earning and possibly multiple rerating: a) Volume pickup led by favourable spot LNG and long-term contract prices; b) timely expansion completion in Dahej leading to significant EPS jump in FY18; and c) improved utilisation of Kochi terminal given early signs of pipeline construction by GAIL.
We believe Petronet is entering a sustained phase of low LNG prices (spot or long term from RasGas). Our channel checks/media reports indicate that a favorable Rasgas resolution is likely to be announced over next 1-2 months.
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