• 3Q20 core net profit exceeded expectations as lower internal gas consumption (IGC) drove up margins
• Cumulative 9M20 dividend matched 9M19 level at 50sen, excluding special dividend (50sen for 2020 and 10sen for 2019)
• We raise our 2020-22E EPS forecasts by 10% to factor in the better margins, and our target price to RM17.40. Hold for its 5% yield

Margin surprise

3Q20 revenue rose 5% yoy to RM1.4bn on stronger utilities revenue, which grew by 9% yoy on the back of higher steam and industrial gas sales. Operating profit soared 32% yoy with all segments reporting better performances, mainly due to lower maintenance costs for gas processing plants coupled with lower IGC costs for transportation and regasification business. 9M20 core net profit rose 10% yoy, on the back of a smaller 3% revenue growth, largely benefiting from lower depreciation, finance costs and higher Pengerang ASU contribution.

Sequentially softer

Revenue was flat qoq, as expected, but operating profit rose 10% qoq benefiting from lower IGC costs for its transportation and regasification business, driving up margins by 5ppts. Associate profit halved, contributing to the 3% qoq drop in core net profit (2Q benefited from a higher nitrogen supply following the Pengerang explosion incident). PTG declared a third interim dividend of 18sen, bringing the 9M20 total dividend to 100sen (including a special dividend of 50sen). Excluding the special dividend, the dividend payout is similar to that for 9M19.

Maintain Hold

We raise our FY20-22 EPS forecasts by 10% to factor in the better operating margins. Our target price is marginally higher at RM17.40 (from RM17.30) with a higher revised WACC (adjusting for beta) imputed to offset the positive earnings revision. While margins surprise positively, the lack of earnings growth justifies a Hold rating with a 5% 2021E yield.

Key risks: unforeseen operational disruption of existing assets; faster recovery or further deterioration in the economic environment affecting its volumes.

Source: Affin Hwang Research - 20 Nov 2020