PETGAS posted a recovery in 3Q16 earnings after being hit by higher repair and maintenance costs in the preceding quarter. However, the improvement was insufficient and the results missed our as well as market consensus estimates. This led us to trim both our FY16- FY17 estimates by 6%. With limited earnings prospects in the near-term until the RAPID RGT is ready by end of next year, we are downgrading the stock to UNDERPERFORM with lower price target of RM21.35/SoP share.

3Q16 below expectations. At 70%/71% of house/street’s FY16 fullyear estimates, 9M16 net profit of RM1.27b came below expectations. The main discrepancy between our estimates and actual results were due to lower-than-expected Utilities earnings coupled with our higher margin assumption for Regasification (RGT) while segment’s top line was on track. It declared a 3rd interim NDPS of 15.0 sen (ex-date: 16 Nov; payment date: 02 Dec), which is higher than 2Q16’s 14.0 sen but the same as for 3Q15, tallying YTD 9M16 with 9M15 at 43.0 sen.

A recovery in sequential earnings. After a 10% decline in 2Q16, PETGAS managed to post 5% QoQ improvement in 3Q16 net profit of RM422.7m, attributable to overall improvement for all business segments except Gas Processing (GP) which saw EBIT dipping 4%. Earnings for Gas Transportation (GT) rose 14% as there was a tariff revision for Sabah in 2Q16. Utilities improved 12% on fuel gas price revision in July and RGT leapt 20% which we believe was due to lower repair and maintenance costs. Meanwhile, share of profit from JV further improved to RM26.4m from RM17.3m previously.

However, not good enough on YoY comparison. 3Q16 net profit declined 11% YoY from RM305.0m in 3Q15 while 9M16 net profit contracted 19% to RM1.27b from RM1.40b last year. This was due to higher depreciation and repair & maintenance costs at GP, both GT and RGT faced higher repair and maintenance costs while higher opex dragged Utilities earnings lower. The weaker results came on despite improved revenue where GP posted higher PBS income on higher plant’s liquid extraction performance, Utilities benefited from two upward fuel gas price revisions in Jan and July this year while RGT gained on softening MYR for its USD-based storage fees.

Stable earnings. Unlike its two other sister companies, namely PCHEM (MP; TP: RM7.18) and PETDAG (OP; 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. However, earnings growth is limited as the only new earnings driver, the RAPID RGT in Pengerang which will commence in 4Q17.

Reduce to UNDERPERFORM. Given the lower-than-expected recovery in earnings, we decided to trim both FY16-FY17 estimates by 6% mainly on the adjustments for the abovementioned Utilities and RGT segments. New price target is now lowered to RM21.35/SoP share from RM21.95/SoP share. In view of limited earnings growth prospects in the near-term, we downgrade the stock to UNDERPERFORM from MARKET PERFORM previously.

Risk to our downgrading is favourable upward revision in GP margin, GT tariff rate and RGT storage fee, which will boost profitability

Source: Kenanga Research - 3 Nov 2016