3Q18 results are well within expectations. RGT in Pengerang, which started in November last year, is the main earnings driver for PETGAS. Meanwhile, we believe the upcoming TPA, which is one of the main reasons suppressing PETGAS’ share price, will have a neutral impact as the PH government will continue to be probusiness despite its populist policy. OUTPERFORM maintained at target price of RM22.80.

3Q18 in line. At 77%/79% of house/street’s FY18 estimates, 9M18 core profit of RM1.50b came in within expectations. It declared 3rd interim NDPS of 18.0 sen (ex-date: 13 Dec; payment date: 27 Dec) in 3Q18, which is higher than the 16.0 sen paid both in 2Q18 and 3Q17, totalling YTD 9M18 NDPS to 50.0 sen vs. 47.0 sen paid in 9M17.

Weaker sequential results as taxation normalised. Despite revenue growing 3% to RM1.40b, 3Q18 core profit fell 2% QoQ to RM504.5m which was largely due to higher taxation which normalised from the tax incentive granted to Pengerang RGT. In fact, pre-tax profit was flattish at RM504.5m. The higher revenue in 3Q18 was mainly attributed to Utilities segment which saw revenue jumping 13% to RM348.6m on upward fuel gas price revision and additional surcharge on electricity tariff as well as higher customers’ demand for all products.

New RGT led earnings growth. On YoY comparison, 3Q18 core profit leapt 22% from RM412.2m while revenue surged 21%. This was primarily owing to the Pengerang RGT which was started in November last year. As such, RGT segment’s revenue and EBIT soared 140% and 135%, respectively. Meanwhile, both Gas Processing (GP) and Gas Transportation (GT) achieved 99% reliability in 3Q18. Similarly, 9M18 core profit was lifted 16% while revenue jumped 17% which was largely due to the new Pengerang RGT.

TPA remains the only issue going forward. Share price of PETGAS continued to come under pressure since 2017 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 PH government will likely 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. Like its sister companies, PETGAS is one of the few doing very well in share price performance this year as investors are looking for earnings quality and sustainability in time of uncertainty like the present times. It remains OUTPERFORM with an unchanged target price at RM22.80/SoP share. Risk to our call is a severe reduction of rates under the TPA.

Source: Kenanga Research - 03 Dec 2018