• PGas 3Q17 core earnings fell 2.9% yoy and 1.6% qoq to RM412.2m but was up 1.5% to RM1.3bn for 9M17. This is broadly in line with ours and consensus’ estimates at 73%.
• The weaker earnings were due to higher depreciation charge following completion of capital projects and the Utilities unit impacted by weaker sales volume.

• The Board declared a third interim DPS of 16sen (3Q16: 15sen). This brings 9M17 DPS to 50sen (9M16: 45sen).

• Maintain HOLD on PGas with an unchanged TP of RM18.80. We continue to hold the view that fundamentals are intact as we believe earnings risks have been fairly priced in ahead of the IBR implementation in 2018. Impacted by weaker Utilities

Adjusting for one-off items (largely unrealised forex gains), PGas’ 3Q17 core earnings declined 2.9% yoy and 1.6% qoq to RM412m due mainly to the weaker performance by the Utilities unit while depreciation also rose following completion of several capital projects. Notwithstanding, 9M17 core earnings were still up 2.9% on lower effective tax rate to RM1.3bn to make up 73% of ours and consensus respective estimates.

Utilities segment impacted by lower demand

Revenue for the Utilities segment was up 2% yoy on higher tariff for steam and gas which more than offset the lower sales volume but fell 5% qoq to RM330m. The sequential decline was likely due to planned shutdowns of Petronas Chemicals’ major olefins unit during the quarter. Overall, this led to operating profit margin for the Utilities division to ease to 9.7% (2Q17: 14.6%, 3Q16: 12.7%).

Transportation impacted by higher R&M costs

Meanwhile, the Gas Transmission (GT) unit continues to deliver a fairly robust performance albeit operating profit margin eased by 0.7% yoy on the back of higher repair & maintenance (R&M) cost.

Fundamentals remain sound; no change to earnings

Overall, 9M17 earnings were broadly in-line with our estimates at 73%. We make no changes to our forecasts. We continue to view PGas’ outlook favourably as we believe the share price softness has largely priced in potential earnings impact (ie. lower WACC on regulated assets) under the IBR Framework come 2018.

Maintain HOLD

We retain our HOLD call and SOP-derived TP of RM18.80 on PGas. This implies an FY17F PE of 20.9x before easing to 19.7x in FY18F.

Source: BIMB Securities Research - 13 Nov 2017