Petronas Gas’ (PTG) 9M18 core net profit grew 16% yoy, tracking ahead of our and consensus forecasts due to a lower-than-expected effective tax rate. 9M18 results was mainly driven by the stronger regasification performance following the commencement of new 490mmscfd Pengerang LNG capacity since Nov 2017. PTG declared a 18sen DPS in 3Q, bringing cumulative payout to 50sen (9M17: 47sen). We maintain our HOLD rating and 12-month target price of RM20.10.

Operations in Line (PBT at 77% Forecast); Lower Tax Rate Lifts PATAMI

3Q18 core profit rose 22% yoy at RM505m, after adjusting for a RM4.7m unrealized forex loss. Revenue jumped 21% yoy on the back of a 26% improvement in utilities performance coupled with a 89% growth in the regasification segment, driven by the additional regasification capacity. Aside from the upward revision in fuel gas and additional surcharge on electricity tariff, utilities revenue was also lifted by a better sales demand.

Sequential Margins Dragged Down by Higher Depreciation

3Q18 revenue rose 3% qoq to RM1,402m driven by stronger utilities segment performance as a result of upward fuel gas revision and additional surcharge on electricity tariff, as well as higher customer demand. Operating margin fell 2.6ppts qoq on higher depreciation, which led to a minor core profit decline of 2%.

Maintain HOLD

We raised FY18 earnings factoring in a lower effective tax rate of 20% from an earlier assumption of 24%. Maintain HOLD and 12-month target price of RM20.10. 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 - 3 Dec 2018