• 1Q19 core profit fell 4% yoy on lower rates for the Transportation (GT) and Regasification (RGT) segments under IBR and this was exacerbated by higher maintenance and depreciation charge.

• Against estimates, 1Q19 core profits was broadly inline at 23% of ours and 24% of consensus forecasts.

• A first interim DPS of 16sen was declared, similar to 1Q18 and implied a 61% payout (based on reported net profit).

• HOLD with RM17.60 DCF-derived TP. Our call is with a negative bias due to lower returns under IBR but dividend payout could be raised and injection of Pengerang cogen would enhance profits.

IBR transition begins

2019 marks the pilot year of the GT and RGT segments coming under the purview of the Incentive-Based Regulation (IBR) before it enters first regulatory period (RP1) from 2020 to 2022. The IBR adoption is pursuant to full rollout of the Third Party Access (TPA) as part of the gas supply market liberalisation.

Weaker GT and RGT

This saw GT and RGT margins and profitability coming under pressure as the regulator, Energy Commission, imposed lower rates in tandem with reduced returns on regulated assets. Additionally, GT also saw higher maintenance opex while the RGT incurred higher depreciation charge upon recognition of jetty facilities in RGT Pengerang (RGTP).

Inline with estimates

1Q19 core earnings fell 4% yoy after adjusting for an unrealised forex gain from lease liabilities worth RM58m. We note that revenues for the Processing (GP) and Utilities segments benefited from higher rates. GP enters the 2nd term of its GPA with Petronas at higher rates while the Utilities segment benefited from higher electricity and gas tariffs. All in, core profits were inline at 23%/24% of ours consensus 2019F estimates.

Lower returns under IBR

We view PetGas’ adoption of the IBR Framework negatively. Returns from its lucrative Transportation business would be steadily reduced as the regulator stood firm in valuing the Regulated Asset Base (RAB) using net book value (NBV) method (Table 3). Management noted that plans are underway to grow the Utilities business. We believe the injection of Pengerang CoGen, could boost earnings given its capacity is over 2x larger than the combined CoGen capacity at Kerteh and Gebeng.

HOLD with RM17.60 TP

While our HOLD call has a negative bias in view of lower IBR returns in the medium to long term, we expect dividend payout to be generous (ie. 2018: c.79%; one of its highest).

Source: BIMB Securities Research - 29 May 2019