May 02, 2016
Disclaimer: The opinions expressed herein are that of HSC Securities and not of VietnamAdvisors. This is NOT a solicitation to buy or sell securities.
- GAS has been approved a floor price for the ATOP volumes equal to input prices.
- This effectively protects GAS margins and will see them protect significant % of their net profit over the previous structure which had left them rather vulnerable.
- HSC forecasts NPAT will still decline 19.7% this year however.
- Long term growth will depend on continued expansion of industrial user demand which is assured and an early start to new pipeline expansion to meet new fields which is not.
- The stock is up YTD and has done well in recent weeks on speculation that the latest price will protect the downside.
- In any event with the stock trading below fair value on a regional comparative and the sensitivity to oil prices there are some decent catalysts for the time being. Reiterate Outperform.
GAS new input pricing structure will protect the bottom line. Reiterate Outperform
MAIN TAKEAWAY – GAS’s new input pricing structure which has been agreed with PVN and the government will set a floor price for the ATOP volumes equal to input prices. This effectively protects GAS margins and will see them protect significant % of their net profit over the previous structure which had left them rather vulnerable. Confirms transition to a fee based pricing model. HSC forecasts NPAT will still decline 19.7% this year however. Long term growth will depend on continued expansion of industrial user demand which is assured and an early start to new pipeline expansion to meet new fields which is not.
ACTION – Reiterate Outperform. The stock is up YTD and has done well in recent weeks on speculation that the latest price will protect the downside. In any event with the stock trading below fair value on a regional comparative and the sensitivity to oil prices there are some decent catalysts for the time being.
GAS looks for 20% drop in NPAT in its FY2016 targets – GAS has set FY2016 targets calling for VND54.7 trillion (-15% y/y) in sales and VND7,085 billion (-20% y/y) in NPAT. We find the target reasonable and achievable given the fact that floor prices (before tariff for transportation and distribution) for GAS’s natural gas above take-or-pay volume for electricity producers has been set equal to GAS’s input prices.
Input price adjustment to market levels has been accompanied by a sharp drop in natural gas prices – Since 1st April 2014 gas prices for electricity producers above take-or-pay (ATOP) volume which accounts for about 50% of GAS’s natural gas output have been gradually adjusted to the market benchmark which is defined as 46% of the monthly average fuel oil (MFO) prices in the Singapore market plus transportation & distribution fee. The ATOP price was marked to 70% of the market benchmark from 1st April 2014, then adjusted up to 80% of the market benchmark from 1st July 2014, then to 90% of the market benchmark from 1st October 2014, and finally equal to the market benchmark from 1st January 2015. Meanwhile the market benchmark MFO Singapore has decreased by some 73% from US$750/ ton in March 2014 to around US$200/ton recently in correlation with weak crude oil price during the same time.Hence, in Q4 FY2015 GAS’s ATOP price was lower than its input price, cutting the company’s Q4 FY2015 net profit by 60%.
New price ensures GAS won’t lose out no matter how low the MFO price goes – Recently GAS was given approved by the government to set the floor price for its ATOP volume equal to its input prices. Effective from 1st January 2016. This will ensure that GAS will not make any loss from selling natural gas to electricity producers no matter how low the MFO price is. In our earning model we estimated that the floor price policy would benefit GAS’s Q1 FY2016’s net profit to the tune of about VND1,050 billion. Without the floor price for ATOP volume, i.e. ATOP price is benchmarked to 46% MFO plus transportation and distribution fee, we estimated that GAS’s Q1 net profit would come in at around VND800 billion (-70% y/y). However, with the floor price policy, we estimated that GAS’s Q1 net profit would come in at around VND1,850 billion (-30% y/y). For the whole FY2016, in our earning model we forecast that the floor policy would give GAS a net gain of about VND1,900 billion in net profit assuming crude oil price average in range of US$35 – US$40/bbl in 1-H FY2016 and then US$50 – US$55/bbl in 2-H FY2016.
GAS buys natural gas from six or seven gas field owners at difference prices – In which volume bought at low prices is declining while that at high prices is increasing. Hence, the weighted average input price depends on the volume contribution from each gas source. In our earning model, we forecast that for FY2016 GAS’s natural gas sale volume will come at 10.63 billion cubic meters (+1.6% y/y). Then we forecast that the weighted average input price will come at around US$3.7/MMBTU which is equal to MFO price at US$326.6/ton.
There’s no direct correlation between MFO price and crude oil price, yet based on 15-year history prices of spot Brent vs. MFO 180 CST on Singapore market we estimate that MFO price of US$326.6/ton would correspond with a crude oil price in the range around US$45/ bbl.
HSC looks for 19.7% decline in NPAT this year – HSC forecasts that in FY2016 GAS will post sales of VND58.3 trillion (-9.4% y/y) and NPAT of VND7,188 billion (-19.7% y/y). Based on the following assumptions;
1. For FY2016 in our earning model we forecast that crude oil price will average US$40 – 45/bbl. Of which 1-H average price would come in a range of US$35 – US$40/bbl while 2-H average price would come in a range of US$50 – US$55/bbl.
2. Then, following the floor price policy we forecast that in 1-H FY2016 GAS’s ATOP output price will be US$3.7; while for 2-H FY2016 we estimate GAS’s ATOP price will increase 18.9% to US$4.4. That means GAS’s FY2016 ATOP price will average at US$4.05 (-13% y/y). We then forecast GAS’s average natural gas price will come at US$4.65 (-8.2% y/y).
3. Then for natural gas business we forecast FY2016 sales of VND37 trillion; down 5.2% (on a 1.8% increase in volumes as mentioned above and 8.2% y/y price drop.
4. As for the LPG business, we forecast that GAS will sell a total of 1,085,000 tons of LPG (-18.8% y/y) including 285,000 ton of in-house LPG (+0% y/y) and 800,000 ton of trading LPG (-24.1% y/y). Showing revenues of VND14,130 billion (-29.6% y/y).
5. We also forecast that sale volume of condensate will be 60,000 ton (+0.67% y/y). For revenues of VND341 billion (+2.0% y/y).
6. While we assume that overall revenue from gas transportation will increase by 6% to VND4,576 billion as a results of a 1.8% increase in natural gas volume and about 5% increase in transportation fee.
7. With this we think the natural gas segment will see gross profits of VND5,275 billion (-35.1% y/y) and see GPM declining from 20.9% in FY2015 to 14% in FY2016. We also assume LPG segment will see gross profits of VND1,696 billion (-29.6% y/y) and carry a gross margin of 12%, or flat on FY2015. While we estimate that condensate gross profits will come to VND91,841 billion (+2% y/y) and report stable gross margins at around 27%. Lastly we forecast that gross profits of the gas transportation business comes to VND2,975 billion (6% y/y) assuming GPM remains unchanged at 65%, similar to that of FY2015 as the transportation segment is not affected by crude oil price.
8. Based on this we estimate overall gross profits will come to VND10,462 billion (-21.9% y/y) and lead to an overall GPM of 18.0% vs. 20.8% in FY2015.
9. We then assume net financial income of VND633 billion (+40% y/y) as we forecast GAS’s cash balance will remain stable around VND17 trillion while average deposit interest rate increases by 100 basis point over that of FY2015. Plus we assume that GAS’s interest-bearing debt will be reduced by around VND1.1 trillion or 18% over that of FY2015 as the company pays back its debt.
10. Plus an SG&A of 4.0% of sales vs. 4.25% in FY2015 thanks to GAS’s cost cutting effort.
We see fair value at VND51,700 – Our forecasts are higher than GAS’s sales and NPAT targets by 6.6% and 1.5% respectively given a 7.9% higher in natural gas sale volume. Thus we forecast that GAS will show an FY2016 EPS of VND3,516, implying a FY2016 forward P/E at 13.14x. GAS is also trading at a P/B of 1.8xs andan EV/EBITDA of 6.92xs. Looking at regional comparisons we see fair value at around a P/E of 14.71xs implying a fair value price of VND51,700, about 12% higher than today’s price.
Debt burden is low and won’t increase soon given huge cash balance – GAS currently has a total debt of VND6,093 billion; including VND1,590 billion in short term debt and VND4,503 billion in long term debt. For a debt/equity ratio of 0.32xs. Debts are denominated in both VND and US$ carrying interest rates in the range of 4.5-11.5% for VND, and 0.75% – 6.8% for USD. Given that both of GAS’s natural gas input and output prices are US$ denominated; while the majority of LPG’s input cost are US$ based even as the majority of LPG’s sales are VND, the currency risk is small. Moreover given the current outlook we forecast that capex needs for FY2016 will come to around VND3,900 billion (-25% y/y), mostly for regular fixed asset purchases while GAS’s free cash balance is huge at around VND17.75 trillion. Hence we see no expansion in debt this year.
Investment thesis – Reiterate Outperform. GAS is in transition from a company that takes an active spread plus a fee on natural GAS delivery to a purely fee based pipeline delivery model. And the floor price policy simply works to confirm that trend. Hence we see that GAS’s long-term growth will depend mainly on volume growth. On the natural gas side, demand from industrial users is increasing at a decent clip. Supply is not a big problem given the new gas reserves discovered in the Nam Con Son basin and Lot B – O Mon. However, GAS is operating at 90% capacity of its current pipeline system. Hence any significant volume growth will require construction of new pipeline systems, namely the Nam Con Son 2 pipeline system and the Lot B – O Mon pipeline system.
Both have been in the planning stages for quite a long time without much progress. And we are concerned that there will be limited progress also over the coming two years given the complexity of forming price agreements. Hence our long-term view is fairly cautious. We reiterate Outperform for now given that GAS is trading about 12% lower than regional comparison average P/E. We also hope that crude oil prices will bounce further in the 2-H and give GAS some upside potential. While we note that the downside risk is now limited given the floor price policy.