Although 2Q16 earnings fell 10% sequentially owing to higher repair and maintenance costs, it was still within expectations. While we like its stable earnings streams, the immediate earnings growth is limited as Pengerang RGT is only coming into the system by end-2017. We keep our MARKET PERFORM rating with unchanged price target of RM21.95 based on SoP valuation. It is also supported by a decent dividend yield of c.3%.

2Q16 within expectations. At 47% of house/street’s FY16 full-year estimates, 1H16 net profit of RM850.9m came within expectations. A 2nd interim NDPS of 14.0 sen was declared in 2Q16 (ex-date: 24 Aug; payment date: 08 Sep), which was the same as 1Q16 and 2Q15, totalling YTD 1H16 NDPS to 28.0 sen.

A sequential decline in earnings. While 2Q16 revenue dipped 1% QoQ due to the downward revision of Gas Transportation (GT) tariff in Sabah, net profit fell 10% to RM403.8m owing to higher repair and maintenance costs for Gas Processing (GP), GT and Regasification (RGT) segments while Utilities division incurred higher operation costs. As a result, earnings for GP, GT, Utilities and RGT contracted 22%, 13%, 32% and 10%, respectively. This brought the group operating margin down to 45% from 52% previously. On the positive note, share of profit from JV jumped 64% to RM17.3m from RM10.5m.

Same trend as YoY comparison. Owing to the same reason on higher repair and maintenance costs mentioned above, 2Q16 net income declined 11% YoY from RM451.8m in 2Q15, despite revenue rising 3% from RM1.08b which was led by the USD-billed RGT by 17% as MYR weakened from last year. To note that, 2Q15 core earnings of RM451.8m adjusted for a RM407.4m investment tax allowance granted for plant rejuvenation and revamp. YTD, 1H16 net profit contracted 9% to RM850.9m from RM931.0m due to the higher repair and maintenance costs while revenue rose 3% primarily driven by higher ASP for Utilities segment, which was in line with upward fuel gas price revision effective in Jan 2016.

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: RM7.18) and PETDAG (UP; TP: RM25.40), 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.

Maintain MARKET PERFORM. We believe the mild earnings hit in 2Q16 from higher repair and maintenance costs are unlikely to repeat in the coming quarter, thus we keep our forecast unchanged. We continue to rate the stock a MARKET PERFORM with unchanged price target of RM21.95.

Risk to our call is a delay in the commencement of Pengerang RGT.

Source: Kenanga Research - 10 Aug 2016