• Overview. 2Q19 core profit fell 2% yoy on impact from the GT and RGT segments under the IBR Framework – tax rate was also lower in 2Q18 owing to tax incentives from the Pengerang RGT. On qoq, core profit rose 11% on better margins and lower effective tax rate.

• Key highlights. Our core profit adjusts for unrealised forex gain from US$-denominated lease liabilities with regards to the RGT Sg Udang assets. Margins improved (on qoq basis) due to lower depreciation charge at GP, GT and Utilities segments. Associate contribution rose strongly with contribution from the Air Separation Unit (ASU).

• Against estimates: inline. 1H19 core profit fell 3% drawing impact from the weaker GT and RGT contribution under IBR. It was inline with ours at 48% and consensus at 52%.

• Dividend. A 16sen second interim DPS (2Q18: 16sen) was declared, implying 64% payout, bringing total 1H19 DPS to 32sen.

• Outlook. Management expects its performance to sustain in 2H19. The margin expansion at GP is structural as some assets have been fully depreciated; it guided for 2019 CAPEX of c.RM1.1-1.2bn mainly for major rejuvenation capex at GP. We trimmed estimates by 1-4% (Table 2) on minor housekeeping and updating for higher tax rate.

• Our call. Upgrade to BUY with a lower RM17.25 DCF-derived TP. The recent rout in share price offers a rare buying opportunity in our view as dividend yields are now at over 4.5%, we estimate.

Source: BIMB Securities Research - 28 Aug 2019