PETGAS registered an impressive 4Q17 set of results with a 17% jump in sequential earnings growth, largely led by the new Pengerang RGT which started last November, which was expected by us to start in January. Other segment results were fairly satisfactory. Going forth, the TPA, delayed to next year, remains the only issue, but we still expect neutral impact to its bottom-line. It remains an OUTPERFORM with a target price of RM22.00.

4Q17 matched expectations. PETGAS reported 4Q17 results, which came in line with expectations with core profit growing strongly by 17% QoQ to RM483.7m, tallying FY17 core profits to RM1.77b which came 3%/1% above house/street’s estimates. It declared 4th interim NDPS of 19.0 sen, bringing FY17 NDPS to 66.0 sen which is higher than our assumption of 61.0 sen and 62.0 sen paid in FY16.

Pengerang RGT led earnings growth. 4Q17 core profit jumped 17% QoQ to RM483.7m on the back of 12% hike in revenue, largely due to the new Pengerang RGT (which started in November) boosting RGT operating profit, which doubled to RM153.3m from RM73.7m previously. In fact, Utilities segment also reported 32% jump in EBIT while earnings at Gas Processing (GP) were flattish. However, Gas Transportation’s (GT) EBIT fell 14% due to higher depreciation in line with completion of capital projects. Meanwhile, share of profits from JV surged another 59% to RM32.4m from one of the JV companies. Overall, the earnings were also helped by lower taxation at 16% effectively vs. 22% in 3Q17.

But bottomline crimped by higher MI. Core earnings for 4Q17 and FY17 rose slightly by 2% each from RM474.2m and RM1.74b, respectively. Revenue increased by a higher proportion of 13% and 5% which was largely attributable to the new RGT mentioned above. This was due to higher MI which we believe was also due to the new RGT as PETGAS has only 65% effective stake in the facility. Generally, other segments reported weaker earnings both in 4Q17 and FY17 except GP which posted higher 4Q17 EBIT by 8% due to lower repairs and maintenance. Meanwhile, associate income also jumped higher by 247% and 38% owing to higher profits from one of the abovementioned JV companies.

TPA remains the only issue going forward. Share price of PETGAS continued to come under pressure as the Third Party Access (TPA) framework was delayed to next year, which raised concerns that it 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.

Maintain OUTPERFORM. We fine-tuned FY18 estimates downward by 2% after adjusting for FY17 results while new FY19 forecasts are introduced with earnings growth of 9%. We reiterate that the suppressed share price offers a good buying opportunity as we still believe the eventual TPA will have a neutral impact to PETGAS. Thus, we reiterate 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 - 27 Feb 2018