The good gets better
We maintain BUY on PLNG post its stellar performance in Q2. Expected ramp-up at both terminals, predictable earnings from tied-up volumes and robust gas demand driven by benign spot LNG prices keep our faith intact.
HIGHLIGHTS OF THE QUARTER
* EBITDA came to Rs 11.60bn, +31.3/+13.3% YoY/QoQ, beating our estimate by 11.7%. This was largely on account of higher than anticipated marketing margin on (1) SPOT volumes, and (2) Total volumes. Back calculated marketing margin was Rs 1,679mn as against our expectation of Rs 600mn
* To settle the ongoing litigation with Cochin Port Trust (CPT) on lease rent for the Kochi Terminal, PLNG has recognised Rs 0.72bn in Q2 as an exceptional expense. Adjusting for this, APAT jumped 2.1x YoY/QoQ (in line with est) owing to lower tax rate of 25.1% vs 33.1/35.0% in Q1FY20/Q2FY19. Opting to pay tax at 25.1% led to recalculation of (1) Deferred tax liability for Q1; impact of Rs 3.76bn, (2) Tax expenses for 1Q; impact of Rs 0.70bn, both of which have been recognised in 2Q
* Kochi terminal: Utilisation stood at 15.7% (highest ever) vs 14.1/9.4% in Q1FY20/Q2FY19. We expect its gradual ramp-up to 33% by FY21 post commissioning of the Kochi-Mangalore pipeline in Feb-20 (earlier, Oct19). Current tariffs are Rs 104.5/mmbtu.
* Way ahead for Dahej: Services volumes jumped 12.5% QoQ to 2.5mmt (126tbtu). Surge in these volumes indicates that off-takers are capitalising on soft LNG prices. Although spot volumes were low, we suspect these will rise with (1) Spare capacity availability after Kochi terminals’ volumes are shifted back, and (2) Persistently low LNG prices
* Long term (LT) volumes: PLNG has sourced ~73.3% of RasGas volume in 9MCY19. This eases our concern that it may fail to honor its volume contract with RasGas, given the ~50% differential between spot (~5/mmbtu) and LT prices (>8/mmbtu). We suspect that a price negotiation with RasGas might be on the cards to bridge this, rather large differential.
Capital allocation is a legitimate concern for investors. We believe that PLNG will allocate capital prudently wrt its deal with Tellurian. PLNG made it clear that volumes will be tied-up only to the extent guaranteed by its customers. Moreover, low LNG prices and impending commissioning of Kochi-Manglore pipeline will ensure high utilization of both terminals. The stock is currently trading at 13x FY21E EPS and 7.6x FY21E EV/e. Our TP is Rs 390 (17x Sep-21E EPS). We see the risk/reward as favourable
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