PETGAS is proving to be a consistent performer with the 5th consecutive quarters of inline results yesterday. The 1Q16 results showed a broad-base QoQ improvement thanks to lower opex as the preceding quarter was hit by higher opex on plant repair and maintenance. With Pengerang RGT only coming into the system by end-2017, earnings growth is limited. However, with share price correcting 7% in the past three months coupled with a decent yield of 3%, we upgrade PETGAS to MARKET PERFORM with a new price target of RM21.95/SoP share.

1Q16 Inline. PETGAS reported 1Q16 results, which came in within expectations with net profit of RM447.2m accounting for 25%/24% of house/street’s FY16 full-year estimates. A 1st interim NDPS of 14.0 sen was declared in 1Q16 (ex-date: 23 May; payment date: 08 Jun), which was lower than 17.0 sen paid in 4Q15 but similar as for 1Q15.

A broad-base QoQ improvement ... Despite revenue dipping 1% to RM1.13b, 1Q16 core earnings jumped 19% QoQ to RM447.2m which was largely due to lower operating costs as the preceding quarter was slammed with higher operating costs on plant repair and maintenance. The decline in revenue was led by decline in Gas Transportation (GT) by 1% on lower booking capacity on shortened working month in Feb 2016 as well as lower Regasification (RGT) revenue on lower storage fees as USD weakened against the MYR. Overall, Gas Processing (GP) earnings soared 66%, 15% for GT and 210% for Utilities. However, share of profit from JV plunged 57% to RM10.5m from RM24.6m previously.

... but declined YoY. 1Q16 net profit declined 7% YoY from RM479.1m although revenue grew 3%, which was due to: (i) higher depreciation for GP, (ii) lower share of profit from JV, and (iii) higher taxation. In addition, GT and RGT earnings were impacted by higher repair and maintenance costs. The growth in revenue was led by: (i) +4% in GP attributed to higher performance based structure (PBS) income, and (ii) +5% in RGT due to higher storage fees as USD strengthened against MYR.

Stable earnings. With the Lahad Datu RGT already called off, the RAPID RGT in Pengerang is the only earnings catalysts for PETGAS, which will commence in 4Q17. Unlike its two other sister companies, namely PCHEM (OP; TP: RM7.31) and PETDAG (UP; TP: RM24.20), PETGAS is least affected by the crude oil price movement and earnings are mainly determined by business volumes of GP and GT while Utilities may be the only business segment likely to be affected by oil prices.

Upgrade to MARKET PERFORM. While keeping our forecast unchanged, we are rolling-over our valuation base-year to CY17 to derive a new price target of RM21.95/SoP share from RM21.99/SoP share previously. With its share price having fallen 7% in the past three months coupled with a decent yield of c.3%, we are upgrading the stock to MARKET PERFORM from UNDERPERFORM previously. Risk to our call is any delay in the commencement of Pengerang RGT. 

Source: Kenanga Research - 10 May 2016