Petronas Gas’ (PTG) 1Q19 net profit declined 4% yoy, in line with expectations, delivering 25% and 24% of our and the street’s full-year forecasts. The weaker results were affected by higher maintenance and finance costs, as well as lower gas transportation and regasification tariffs under the pilot regulatory period. Earnings could potentially see more downside in 2020 when RP1 comes into effect. We cut our earnings forecasts and lower our target price to RM17.00. Maintain HOLD.

Net Profit Lower by 4% Yoy – in Line With Expectation

1Q19 revenue was relatively flat at RM1,368m (+1% yoy) supported by stronger gas processing and utilities segments on higher reservation charges under the second term GPA, as well as higher electricity and steam prices for the latter. The gains were offset by a weaker gas transportation segment under the new tariff following the implementation of third party access (TPA). Core profit was down 4% yoy, despite revenue being flat due to higher maintenance and finance costs.

Early Completion of ASU RAPID Boosted JV Profit

Core net profit was up 1% qoq driven by a stronger joint venture profit following the early completion of the air separation unit (ASU) in RAPID. This partly mitigated the weaker gas transportation contribution and weaker overall margin as a result of higher maintenance costs incurred in 1Q19.

Results Call Revolved Mainly Around the New RP1 Tariff

Management had submitted the RP1 proposal to the Energy Commission in Apr-19, and guided that tariffs in 2020 would likely be similar to those in the pilot period. The final outcome is expected to be annouced in 4Q19.

Maintain HOLD

Despite management’s guidance that tariffs will be largely similar, we are taking a more conservative approach and cut our 2020-21E EPS by about 5% after factoring in a slight lower RP1 profit. This led to us lower our 12- month SOTP-based target price to RM17.00 (from RM17.30) as we rolled forward the valuation horizon to FY20E. We maintain our HOLD rating. Based on our 70-sen full-year FY19 dividend payout forecast (FY18: 72sen), the stock offers a dividend yield of 4.3%.

Source: Affin Hwang Research - 29 May 2019