PETGAS reported yet another set of satisfactory results in 2Q17 results albeit a broad-base minor decline in earnings sequentially across all business segments on higher opex. In fact, earnings improved from last year partly due to lower repair and maintenance. Meanwhile, the stock continues to be suppressed by fears of a new TPA which could crimp earnings severely. However, we believe the concern is overdone. We maintain OUTPERFORM on the stock with unchanged price target of RM22.00/SoP share.

2Q17 matched expectations. At 51%/49% of house/street’s FY17 estimates, 1H17 core profit of RM878.6m came within expectations. Meanwhile, it declared a higher 2nd interim NDPS of 16.0 sen (ex-date: 28 Aug; payment date: 14 Sep) in 2Q17, against 15.0 sen paid in 1Q17 and 14.0 sen paid in 2Q16. This totalled 1H17 NDPS to 31.0 sen against 28.0 sen in 1H16.

Weaker sequential results. Despite flattish revenue, 2Q17 core profit fell 9% QoQ to RM418.3m from RM460.2m mainly due to higher opex across all business segments as well as lower associate income of RM4.5m from RM30.5m in 1Q17. With higher operating costs, operating profit for Gas Processing (GP) declined 9%, Gas Transportation (GT) dipped 1%, Utilities fell 2% and Regasification Terminal (RGT) contracted 5%.

Higher YoY earnings across all segments. 2Q17 core profit rose 3% from 405.9m last year on the back of 5% hike in revenue. Besides higher revenues, lower repair and maintenance costs for GP, GT and RGT helped to push earnings higher but were partly offset by higher Utilities sales of cost. In addition, RGT earnings were also helped by the weakening of MYR for its USD-priced storage fees. YTD, 1H17 core income rose 4% to RM878.6m as revenue also grew by 4% from 1H16. This was attributable to the same reasons mentioned with lower repair and maintenance at GT and RGT, but earnings were crimped by higher Utilities’ selling cost. Meanwhile, lower 1H16 earnings for GP were due to a one-off staff cost adjustment.

TPA is the only issue going forward. Share price of PETGAS came under pressure for quite some time on concerns of a new Third Party Access (TPA) framework that could severely impact its earnings on lower rate while processing income would be lower as customers may opt to import their own gas supply. Although there is less than half a year to Jan 2018 when the TPA is implemented, the authority has yet to finalise the mechanism. In our opinion, being a Petronas company, government may protect PETGAS’ interest to ensure earnings certainty. Moreover, based on experiences of ICPT and GCPT mechanisms, TENAGA and GASMSIA suffered no negative impact but instead the fuel and gas costs are passed through to end-users eventually. As such, the TPA could turn out neutral to PETGAS.

Still OUTPERFORM. We maintain that the sell-down on the stock previously could be overdone as it has gone beyond the worst-case scenario with negative impact on SoP by 8% and affect FY18 earnings and beyond also by c.8%, if any. Thus, we maintain our OUTPERFORM rating on the stock with unchanged price target of RM22.00/SoP share. Risk to our call is a severe reduction of rates under the TPA.

Source: Kenanga Research - 16 Aug 2017