The strong set of 1Q18 results came as no surprise, led by the new Pengerang RGT which will continue to lead further growth. Meanwhile, we believe the new PH government will continue to the pro-business environment despite its populist policy. Thus, the upcoming TPA will have a neutral impact as it does not involve the public directly. It remains an OUTPERFORM with a revised target price of RM22.80.

1Q18 within expectations. PETGAS reported 1Q18 results, which matched expectations with core profit growing by 4% YoY to RM476.1m accounting for 26%/25% of house/street’s FY18 full-year estimates. It declared first interim NDPS of 16.0 sen (ex-date: 31 May 2018; payment date: 12 Jun 2018) against 15.0 sen and 19.0 sen paid in 1Q17 and 4Q18 respectively.

Taxation normalisation impacted sequential results. Despite turnover rising 4% to RM1.35b, 1Q18 core earnings dipped slightly by 1% QoQ to RM476.7m which was due to higher taxation (+38%) owing to the normalisation of the effective tax rate of 21% from 16% previously. The lower taxation in 4Q17 was attributable to the recognition of RAPID tax incentive for the new Pengerang RGT which started last November. In fact, at EBIT level, operating profit rose 8% to RM659.0m on broad-base improvement for all segments while the higher revenue was led by higher revenue from Utilities by 6% on the upward revision of fuel gas price in Jan 2018, and RGT by 8% on the new Pengerang RGT. However, earnings were mitigated by lower JV contribution by 48%.

New RGT led earnings growth. YoY, 1Q18 core profit grew 4% from RM460.2m on the back of 16% hike in revenue. The improved results were largely due to the new RGT earnings which saw the segment’s EBIT surged 124% to RM174.1m. While Utilities and Gas Transportation earnings rose higher on hike in fuel prices and O&M revenue, Gas Processing posted 9% decline in operating profit on higher depreciation following the completion of statutory turnaround activities and higher staff costs. Again, bottom-line was impacted by lower JV contribution.

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 new PH 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. In our opinion, the upcoming TPA will have a neutral impact to PETGAS as it does not impact the public directly given that it deals only with businesses. We reiterate that the suppressed share price offers a good buying opportunity. Thus, we retain our OUTPERFORM rating on the stock with a revised target price of RM22.80/SoP share from RM22.00/SoP share previously after rolling over the valuation base year to CY19 from CY18. Risk to our call is a severe reduction of rates under the TPA.

Source: Kenanga Research - 18 May 2018