• 3Q18 core earnings eased 2% qoq but surged 22% yoy while 9M18 rose 16% to come in ahead of ours and consensus’ estimates at 78%.

• The improved performance was due to structural growth at the regasification unit, strong sales volume for the Utilities segment and higher PBS income at GT and GP segments.

• A third interim DPS of 18sen was declared, bringing total DPS for 9M18 declared to 50sen – a 66% payout.

• No change to earnings pending updates from management. HOLD with an unchanged DCF-derived TP to RM18.90.

Encouraging performance

3Q18 core earnings eased 2.4% qoq but rose 23.3% yoy while 9M18 earnings grew 16% to RM1.5bn; this was above ours and consensus estimates at 78%. The yoy improvement was on the back of structural growth from the new Pengerang regasification terminal, higher PBS income at the Gas Processing (GP) and Gas Transportation (GT) divisions, strong sales volume for the Utilities segment and encouraging performance at its JV/associates.

Higher PBS income for GP and GT

The Gas Processing (GP) and Gas Transportation (GT) divisions grew on combination of higher performance based structure (PBS) income and higher O&M revenue from the Sabah-Sarawak Gas Pipeline (SSGP; this relates only to GT).

Strong Utilities uplift

The Utilities division performed strongly on the back of higher selling price and volume. Consequently, operating profit more than doubled while margin expanded 8ppts yoy to 18%.

Qoq weakness on higher taxes and opex

Sequentially, performance was slightly weak as core earnings fell -2.4% mainly due to higher effective tax rate. Operational earnings were flat as revenue uplift was offset by higher depreciation charge at the GP and GT following the completion of capital projects and higher opex.

Third interim dividend of 18sen declared

A third interim DPS worth 18 sen was declared. This brings total DPS declared for 9M18 to 50sen, implying a dividend payout of 66%.

Maintain HOLD with RM18.90 TP

Maintain HOLD with an unchanged RM18.90 TP. As we inch closer to 2019F, more clarity on PetGas’ adoption of the IBR Framework for its GT division could be expected. In the 2Q18 update, management expects a fair outcome from negotiations with EC. We look forward to the upcoming management update session for 3Q/9M18.

Source: BIMB Securities Research - 3 Dec 2018