• 2Q18 core earnings grew 8.4% qoq and 23% yoy while 1H18 rose 13% to be in line at 53% of ours and consensus’ estimates.

• The increase was driven by structural growth of the regasification unit with the new terminal in Pengerang while Gas Processing and Transportation segments also posted healthy growth.

• A second interim DPS of 16sen was declared, bringing total 1H18 DPS declared to 32sen – a 64% payout.

• We tweak our forecasts on minor housekeeping. Maintain HOLD with a new DCF-derived TP to RM18.90 (prev: RM18.80).

Steady growth

2Q18 core earnings rose by 8.4% qoq and 23.3% yoy to RM516m on structural growth from the new Pengerang regasification terminal. The other divisions also saw healthy growth and led to 1H18 core earnings growth of 13% to RM993m. This is inline at 53% of ours and consensus 2018F forecasts.

GP & GT performed well, Utilities weakened

The Gas Processing (GP) and Gas Transportation (GT) divisions grew on combination of higher performance-based structure income, lower opex and higher O&M revenue from the Sabah-Sarawak Gas Pipeline (SSGP; this relates to GT). Utilities division saw higher sales from price increase but gains were offset by rise in opex. The associate and JV contribution weakened slightly possibly on forex impact at its Kimanis Power Plant operations.

Qoq growth due to lower effective tax rate

2Q18 earnings rose 8.4% qoq on lower effective tax rate which eased to 15% on tax incentives granted to the Utilities and regasification unit. Management guided 2018F effective tax rate of 15-18%.

Updates on tariff negotiation with Energy Commission (EC)

Management shed some light on negotiations with EC regarding tariffs for regulated businesses – GT and Regasification units. Some of the proposals made were to stagger adoption of tariff based on net book value from depreciated replacement cost (DRC) over several years. It also expects asset rate of return (ie. WACC) used for tariff setting to be lower than current (ie. over 9%) agreement with Petronas.

Maintain HOLD with RM18.90 TP

We reiterate our HOLD call on PGas with an unchanged RM18.90 TP after some minor housekeeping of our numbers. Management is optimistic that outcome from the negotiations with EC would be fair to PGas yet accommodative to the gas liberalisation agenda.

Source: BIMB Securities Research - 16 Aug 2018