GAS – Transforming into a pure gas distributor – Update

• 9M20 net profit came in at VND6,150bn, down 31.2% yoy but slightly above expectations at 82.8% of our full-year forecast.
• We raise our TP to VND87,900 on higher FY21F EPS forecast and higher FY21-23F target P/E of 15.3x. Reiterate Hold.

Better-than-expected 9M20 results on effective cost management

PVGas reported a 29.8% yoy decline in 3Q20 net profit, mainly due to lower sales volume of gas products (dry gas -6.0% yoy, LPG -4.0% yoy) and lower ASP on the back of a 34.3% yoy decline in the benchmark Singapore fuel oil price. For 9M20, the company posted a 31.2% drop in net profit to VND6,150bn, which came in slightly above our expectations at 82.8% of our FY20F forecast due to lower-than-expected SG&A expenses and lower interest expense as the company paid off debt faster than our projection. Therefore, we adjust our SG&A and interest expense assumptions to better reflect the 9M20 results, leading to an 8.6% increase in FY20F EPS forecast.

Sao Vang Dai Nguyet to ease the gas supply shortage in 2021-23F

On 16 Nov, PVGas announced that it received first gas from Sao Vang field, sticking to its schedule for first gas in 4Q20F. Although the contribution of Sao Vang would be minimal in 2020F, we estimate this field could add 800-900 mcm of gas p.a. to total volume from 2021F onwards; while Dai Nguyet field remains on track to come online in 3Q22F, adding another 800 mcm of gas p.a. We estimate these two fields to generate VND0.9tr-1.6tr in gross profit for PVGas in 2021-23F, making up c.14% of the dry gas segment’s gross profit. We forecast FY21F EPS to increase 35% yoy, on the back of a recovery in gas sales volume (+5.2% yoy) and higher oil price (+ c.16% yoy).

Medium term profitability to come from gas transportation

In 2020-24F, total gas sales volume is forecast to grow at a CAGR of 5.0% as the supply from depleting old fields is replaced by new sources such as Sao Vang – Dai Nguyet from 2021-22F, imported LNG from 4Q22F and Block B – Blue Whale from 4Q24F. We believe that with the new supplies, PVGas would benefit mainly from gaining the transportation tariff, without the profit from differences between gas purchasing-selling prices. We estimate gross profit contribution from gas transportation to increase from an average of 21% in 2015-19 to an average of 33% in 2020-24F.

Reiterate Hold at higher TP of VND87,900

We raise our TP to VND87,900 as we roll our valuation to 2021 and apply a higher target P/E of 15.3x on FY21-23F EPS. We are using a 7-year historical average P/E instead of 0.5 s.d. below mean P/E previously as the ongoing oil price recovery has lifted investor sentiment on oil and gas stocks. Upside risk is higher-than-expected oil price; downside risks include delays in gas field development and an extended Covid-19 pandemic putting pressure on oil prices.

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