Petronas Gas (PTG) recorded a core net profit of RM1,940m (+9% yoy) for FY18 – in line with our and consensus expectations. The losses incurred at the associate level was a surprise due to the derecognition of deferred tax assets (DTA) relating to the Kimanis Power operation. We are maintaining our forecasts pending more updates on the announced third party access (TPA) framework from today’s briefing. PTG declared an interim dividend of 22sen, bringing the full-year DPS to 72sen, or a payout ratio of 79% (FY17: 66sen at 73% payout). We make no changes to our HOLD call and TP of RM20.10.

FY18 Revenue and Core Profit Up 14% and 9%

Full year FY18 core net profit of RM1,940m was within expectations, accounting for 99% of our and 100% of the consensus estimates. The weaker 4Q headline profit was due to losses incurred at the associate level as a result of the de-recognition of DTA in relation to certain tax benefits which have a 7-year utilisation limit for the Kimanis Power operation. The improved topline in FY18 (+14% yoy) was largely driven by: (i) the higher regasification revenue (+85% yoy) following the commencement of the Pengerang LNG regasification terminal in November 2017, and (ii) higher utilities revenue (+21%) on the back of a higher volume of electricity and industrial gas as well as an upward revision in the fuel gas price.

Associate Losses Dragged Down 4Q Earnings

Although the 4Q18 revenue was relatively flat qoq, core net profit declined by 10% impacted by the higher effective tax rate (from 17.5% to 23.5%), and weaker associate profit (after excluding the deemed one-off DTA derecognition).

Maintain HOLD

We maintain our HOLD recommendation and SOTP-based 12-month target price of RM20.10 (7.4% WACC, 2% terminal growth) and will provide an update upon more clarity on the TPA framework. The regulated asset base has been determined by the Energy Commission (EC), but the allowable WACC would be a determining factor to the upside/downside risk to our current target price.

Source: Affin Hwang Research - 19 Feb 2019