Petronas Gas’ (PTG) 1H18 core net profit grew 13% yoy, in line with our expectations. Earnings growth was mainly driven by the commencement of the Pengerang regasification terminal (RGT), while the other segments recorded decent 2-5% revenue improvements. PTG declared a similar 16sen DPS in 2Q, bringing the 1H18 DPS to 32sen (1H17: 31sen). As the share price is approaching our target price and with limited near term re-rating catalysts, we downgrade the stock to a HOLD. We maintain our 12-month target price of RM20.10.

Revenue Higher Across the Board, Mainly From RGT Terminal

After adding back RM6.8m in unrealized forex losses, 2Q core net profit came in at RM516m (+8.4% qoq, +23.3% yoy) on the back of higher revenue of RM1,358.3m (+0.6% qoq, +15.7% yoy). All segments across the board recorded higher revenues, with gas processing inching up 2%, while both transportation and utilities increased by 5% yoy. The main growth driver was, however, the new Pengerang RGT project. All in, the earnings tracked within our and consensus estimates, at 54% and 53% of our respective full-year forecasts.

Lower Tax Lifted Sequential Profit

Both the revenue and operating margins were relatively flat qoq. However, core net profit increased 8.4% qoq due to the effective tax rate being 5.5ppts lower as a result of the recognition of RAPID tax incentives for the Pengerang RGT project.

Downgrade to HOLD

We make no changes to our earnings forecasts and target price, but downgrade the stock to a HOLD (from Buy) on valuation. The tariff discussion with the Energy Commission (EC) remains on-going. As we move closer to 2019, 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’ concerns. A key upside risk would be a favourable outcome on the PGU tariffs; downside risks include an unfavourable outcome and any unforeseen operational disruption of existing assets.

Source: Affin Hwang Research - 16 Aug 2018