Petronas Gas’ (PTG) 2019 core net profit declined by 3% yoy, which was in line with our forecast. Contribution from the transporation segment was weaker in tandem with the downward tariff revision, but this was offset by a stronger processing segment on a higher reservation charge. JV profits came in stronger after the commencement of the Pengerang ASU plant in 1Q19. PTG declared a special dividend of 10sen, bringing the ytd dividend to 82sen (10sen above 2018’s). We maintain our Hold rating but lower our target price at RM16.03 (from RM16.25) on a more cautious macro environment.

Core Profit Declined by 3% Yoy, Within Expectations

Stripping out the RM11m unrealized forex gain and RM2m disposal gain on PPE, the 4Q19 core profit came in at RM472m (+6% qoq, +4% yoy), bringing the 2019 core profit to RM1.9bn (-3% yoy). The lower earnings were mainly due to the weaker transportation and regasification segments with downward revision of tariffs under the IBR framework. The revision in tariff also led to a 4ppt yoy drop in EBITDA margin. Overall, the earnings are broadly in line, comprising 104% of our full-year forecast and 101% of consensus.

Flat Full-year Revenue With Stronger Processing and Utilities

Overall, 2019 revenue was relatively flat yoy, supported by a stronger processing segment, lifted by a higher reservation charge under the second-term Gas Processing Agreement effective 1 January 2019. This was partly offset by a weaker transportation segment due to lower tariffs under the IBR framework.

Forecasts Cut to Reflect Weak Macro Environment, Maintain HOLD

We cut our 2020-21E earnings by 5-10% as we factor in weaker demand on the back of a more challenging macro environment. As a result, we lower our SOTP-based target price to RM16.03 (from RM16.25) while maintaining our Hold recommendation. Despite the limited re-rating catalysts, we like PTG as its dividend yields look sustainable at ~4%, still the highest among the Petronas-linked companies. Key risks to our call include better-or worse-than-expected demand affecting volume.

Source: Affin Hwang Research - 19 Feb 2020