Petronas Gas’ (PTG) 2Q19 core net profit was in line with expectations. Its gas transportation business was impacted by higher operating costs in 6M19, offsetting the gains from gas processing, with results also supported by a stronger JV profit from the Pengerang ASU project start-up. PTG declared another 16sen interim dividend, bringing the ytd payout to 32sen (similar to 6M18). We maintain our HOLD rating and tweak our target price lower to RM16.25 (from RM17.00)

6M19 Delivered 53% / 52% of Our and Consensus Forecasts

Despite yoy stronger gas processing and utilities segment results reported in 2Q19, the regasification and transportation segment wiped out both of these gains on the back of higher plant operating expenses and a lower tariff under the IBR framework. The quarter also saw a stronger JV contribution from higher profits of the Pengerang ASU project.

Lower Operating Costs and Higher JV Profit Drive Growth

Sequentially, overall revenue was up 1% as the regasification segment grew by 2% and gas processing and transportation revenue inched up by 1%. Core net profit increased by 11%, led by a higher EBITDA margin (+1.3ppts) as a result of lower operating costs, and a stronger JV profit (+18%).

Takeaways From Results Conference Call

The tariff proposal for RP1, which will take effect from 2020-2022 and has been submitted since April 2019, is still under review with no guidance being provided in the results call. Any clarity will only be shared closer to November 2019. PTG is expected to spend significantly higher capex in the 2H as it kept its capex guidance unchanged at RM1.2bn (6M19 only made up 29% of full-year capex guidance thus far), to be spent on the revamping and rejuvenation of its second gas processing complex.

Maintain HOLD

PTG is now trading at 17x forward PER, -1.5SD below its 5-year average of 21x. We believe valuation would unlikely rerate in the short term pending more clarity on the allowable return, and with profit expected to decline progressively following the change in regulated asset base. We maintain our HOLD call and lower our target price to RM16.25 (from RM17.00) adjusting our working capital assumptions and reflecting our lower Gas Malaysia target price (from RM3.02 to RM2.91) post results.

Key upside/downside risks depend on the outcome of the allowable return, as well as any unforeseen operational disruption of the existing assets which might lead to more downside risks.

Source: Affin Hwang Research - 28 Aug 2019