PETGAS posted a satisfactory FY16 results with Utilities segment being the key performer thanks to the two upward revisions in fuel gas prices last year. Having said that, earnings prospect will remain flattish before the new RAPID RGT comes on-stream this year-end, which will propel earnings higher in FY18. As share price has corrected 7% in the past three months, we believe the stock is now trading at a fair valuation. Thus, we upgrade PETGAS to MARKET PERFORM which offers a decent yield of 3%, with unchanged price target of RM21.35/SoP share

FY16 within expectations. At 101%/100% of house/street?s FY16 estimates, the FY16 net profit of RM1.74b came well within expectations. It declared a final NDPS of 19.0 sen (ex-date: 07 Mar; payment date: 22 Mar) in 4Q16, bringing FY16 NDPS to 62.0 sen vs. our assumption of 60.9 sen and 60.0 sen paid in FY15.

Sequential results helped largely by taxation. Despite revenue dipping 1%, 4Q16 net profit rose 10% to RM465.1m from RM422.7m in 3Q16, which was largely due to lower taxation by 83% or RM103.7m owing to the reversal of over provision in prior year for a total of RM77.1m. Operational-wise, segmental earnings declines were broad-base, with Gas Processing (GP) fell 8%, Gas Transportation (GT) 11%, Utilities 2% and RGT 1% although top-lines were fairly flattish.

Utilities led YoY earnings higher. On yearly comparison, 4Q16 net income grew 12% from RM376.4m on a 12% hike in revenue largely in Utilities earnings as the upward fuel gas price revisions in Jan and Jul 2016 boosted revenue by 15%, hence, profit jumped 134%. The good results were also helped by higher earnings of 15% from GP arising from lower utilities cost. Likewise, the strong Utilities earnings also contributed to the group at pre-tax level which rose 5% but FY16 net profit fell 2% to RM1.74b from RM1.78b mainly due to weaker earnings across all segments except Utilities.

Resilient earnings; RAPID RGT to lead growth. Unlike its two other sister companies, namely PCHEM (MP; TP: RM7.65) and PETDAG (OP; TP: RM26.63), 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 will only impact FY18 earnings positively as it only commences in 4Q17.

Upgrade to MARKET PERFORM. While keeping FY17 estimates unchanged, we introduced new FY18 forecasts with earnings expecting to grow at 9% on the back of new contribution from the RAPID RGT. As share price has declined 7% in the past three months since our downgrade call last November, the stock is now back to fairly priced level. Thus we upgrade PETGAS back to MARKET PERFORM which still offers decent yield of 3%. Target Price is maintained at RM21.35/Sop share. Risk to our upgrade is unfavourable downward revision in GP margin, GT tariff rate and RGT storage fee, which will depress profitability.

Source: Kenanga Research - 24 Feb 2017