PETGAS reported another satisfactory set of 3Q17 results, which saw relatively flattish earnings with marginal 1% dip in sequential results. While upcoming 4Q17 results are expected to be fairly flattish as well, focus will remain the same on the new TPA which will take effect from Jan 2018. We still believe the sell-down is overdone over concerns that the new TPA could crimp earnings but we expect the TPA to have neutral impact to PETGAS. It is maintained as an OUTPERFORM with target price of RM22.00.

3Q17 matched expectations. PETGAS reported 3Q17 results, which came within expectations with core profit dipping 1% to RM412.2m, totalling YTD 9M17 core earnings to RM1.29b that accounted for 74%/72% of house/street’s full-year estimates. It declared 3rd interim NDPS of 16.0 sen (ex-date: 23 Nov; payment date: 08/12) bringing 9M17 NDSP to 47.0 sen vs. 43.0 sen paid in the same period last year.

Slight dip in sequential results. 3Q17 core earnings slid slightly by 1% to RM412.2m which was in tandem with 1% fall in revenue, mainly due to weaker earnings from Gas Processing (GP) and Utilities segments following lower demand from customers due to turnaround and higher depreciation respectively. GP posted 8% or RM12.4m decline in operating profit while Utilities registered 37% or RM15.7m fall in earnings. Meanwhile, earnings from RGT were flattish while Gas Transportation (GT) saw its EBIT rising 3% over the quarter. On the other hand, share of profits from JV surged to RM20.4m from RM4.5m previously.

Mixed results from last year. 3Q17 core earnings slipped 2% from RM420.1m in 3Q16, although revenue barely changed at RM1.16b. The fall in earnings was mainly led by Utilities where its earnings fell 28% or RM10.3m. In fact, the other three units also reported marginal decline in operating profit. YTD, 9M17 core profit improved slightly by 2% to RM1.29b from RM1.27b last year as revenue rose 3% over the year. This was primarily contributed by RGT (+7%) and GT (+2%) but was mitigated by lower earnings at GP (-5%) and Utilities (-5%).

TPA is the only issue going forward. Share price of PETGAS still 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. In our opinion, being a Petronas company, the 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 with fuel and gas costs passed through to end-users eventually. As such, the TPA could turn out neutral for PETGAS.

Retain OUTPERFORM. We maintain our view that the sell-down on the stock which has lost >16% YTD could be overdone as it has gone beyond the worst-case scenario with negative impact on SoP by 8% and also affected FY18E 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 - 13 Nov 2017