Petronas Gas (PTG) recorded a decent set of 1Q18 results, with core PATAMI at RM476.3m (+3.5% yoy). This is within expectations, accounting for 25% of both our and consensus FY18 forecasts. PTG declared its first interim DPS of 16 sen, higher compared to 15 sen in 1Q17. We did some housekeeping to our earlier earnings forecasts following the release of the 2017 annual report. We upgrade to BUY as we roll forward our valuation and lift our TP to RM20.10.

Revenue Rose on Better Regasification and Utilities

PTG’s 1Q18 revenue rose 15.5% yoy mainly driven by stronger regasification revenue, which jumped 82% on the back of the new Pengerang regasification terminal contribution, which started from November 2017 onwards. In tandem with higher regasification revenue, operating profit increased 1.24 fold yoy. Utilities segment reported 11% higher revenue as a result of the upward revision of the fuel gas price, which drove segmental profit higher by 5%. Gas processing and transportation revenue were relatively flat yoy at +1%/+3% respectively.

Weaker Sequential Profit

Sequential core PATAMI declined 1.5%, impacted by lower joint-venture profits and higher tax expenses, which was off a low base in 4Q17 as a result of recognition of RAPID tax incentives for the LNG regasification terminal in Pengerang.

Tweaking Earnings on Housekeeping Adjustments

We lower our FY18-20E earnings by 5-7% post housekeeping on some of our earlier assumptions following the release of the 2017 annual report, which include: i) interest costs, ii) revised capex assumptions at RM1.3bn across the 3 years, and iii) minor operating margin tweaks.

Upgrade to BUY and Lift TP on Rolled Forward Valuation

We lift our SOTP-based target price to RM20.10 (from RM19.22) and upgrade PTG to BUY as we roll forward our valuation to FY19. Recall that the Energy Commission (EC) decided to maintain the current tariff under Third Party Access (TPA) until end-2018. As we move closer to that, we believe that the EC will provide better clarity on the revised tariff for the use of the Peninsular Gas Utilisation (PGU) system and regasification terminals, which should allay investors’ earlier concerns.

Source: Affin Hwang Research - 18 May 2018