After a strong earnings surge over the past 3 quarters (ie. since 1Q18), 4Q18 performance normalised as we estimate core earnings fell 10% qoq and 7% yoy to RM453m – the lowest since 3Q17. The subdued results were across all segments barring the Processing (GP) unit. Our core 4Q18 earnings adjusts for one-off expenses worth c.RM140m consisting: i) RM17.4m in PPE impairment for assets with a key client; and ii) deferred tax asset de-recognition at Kimanis worth RM124.3m.
The Gas Transportation (GT) saw lower revenues possibly due to repair works relating to the Sabah-Sarawak Gas Pipeline (SSGP) completing in 4Q18. Meanwhile, RGT was impacted by higher depreciation charge. The Utilities division saw operating profits tumbled (-47% qoq, -7% yoy) on higher feedstock costs while depreciation charge increased with the completion of turnaround and capital projects.
Overall, 12-month core earnings rose 9.7% to RM1.95bn; inline with ours and consensus estimates. Growth was underpinned by Pengerang RGT and higher ASP for the Utilities segment in 2H18.
In our view, Petronas Gas (PetGas) adoption of the IBR Framework is negative. Returns from its lucrative Transportation business would be reduced as the regulator stood firm in valuing the Regulated Asset Base (RAB) using net book value (NBV) method. We seek comfort that there is a transition period for full adoption of the NBV method, implying a soft-landing to earnings, ceteris paribus (Table 3).
While our HOLD call has a negative bias due to lower returns under IBR, dividend payout is expected to be generous (ie. 2018: c.79%; one of its highest). Structural changes could take place, say, injection of the Pengerang cogen as with PetGas cogen asset at the Kerteh Integrated Petrochemical Complex which falls under its Utilities division.
Source: BIMB Securities Research - 19 Feb 2019
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