4Q18 results were distorted by losses from associate Kimanis IPP on de-recognition of deferred tax assets of RM124.3m but operationally, segment results were on track with the new Pengerang RGT leading earnings growth. However, earnings are set to taper off from 2020 on two step-downs in two regulatory 3-year periods. Nonetheless, all negatives are priced in. Thus, we keep MARKET PERFORM at unchanged target price of RM16.45/SoP share.

FY18 missed forecast. At 94%/95% of house/street’s FY18 estimates, FY18 core profit of RM1.83b came in slightly below expectations, which was largely due to losses from associate Kimanis IPP on de-recognition of deferred tax assets amounting to RM124.3m in 4Q18, being PETGAS’ 60%, in relation to certain tax benefits, which now have a 7- year utilisation limit under the new Finance Act 2018. Should we adjust for this, FY18 earnings would be RM1.95b which is on the dot with our forecast and 1% above consensus. It declared 4th interim NDPS of 22.0 sen (ex-date: 01 Mar; payment date: 15 Mar) in 4Q18, which is higher than 18.0 sen and 19.0 sen paid in 3Q18 and 4Q17, respectively. This totalled FY18 NDPS to 72.0 sen which is higher than our forecast of 68.8 sen and the 66.0 sen paid in FY17.

Operationally on track. 4Q18 core profit contracted 35% sequentially to RM328.3m from RM504.5m in 3Q18 while revenue dipped slightly by 1%. This was largely due to the abovementioned share of loss for Kimanis IPP. Operationally, segmental results were fairly in-line with FY18 operating profit of RM2.57b making up 99% of our FY18 forecast. Segment earnings for Gas Processing (GP) grew 5% in 4Q18, which offset a 4% decline in RGT. Meanwhile, Gas Transportation (GT) and Utilities units reported operating profits falling 10% and 47%, respectively, owing to higher maintenance costs and depreciation expenses. The 1% drop in 4Q18 top-line was owing to lower segment revenue from GT and Utilities.

New RGT led earnings growth. On YoY comparison, 4Q18 core profit plunged 32% from RM483.7m, due primarily to de-recognition of deferred tax assets for Kimanis IPP as mentioned above. Overall, segment results posted reasonably growth, especially RGT, as the new Pengerang RGT was started in November last year. On the contrary, Utilities segment posted 10% decline in EBIT owing to higher cost of sales on upward revision of fuel gas price coupled with higher depreciation on statutory turnaround and capital projects. YTD, FY18 core profit rose only 3% to RM1.83b although revenue jumped by a higher proportion of 14%, affected by the Kimanis IPP’s losses. At operating profit level, earnings jumped 13% as RGT registered an 85% surge in profit as the new Pengerang RGT came online last November.

TPA remains the only issue going forward. Although the Pilot Period of 2019 will see less severe impact to PETGAS, its earnings will be impacted by two step-downs, in Regulatory Period 1 (RP1) in 2020- 2022 and Regulatory Period 2 (RP2) in 2023-2025, before stabilising from 2026 onwards. We take the view that its ROA will eventually taper to 8% by 2026. Hence, we expect base-tariff for PGU to reduce sharply by 60% to RM0.502/GJ in 2026 from RM1.248/GJ in 2018. As such, this will continue to dent sentiment on PETGAS. Meanwhile, we keep FY19 estimates unchanged while introduce FY20 forecast in which we expect earnings to decline by 14.7% on the back of base-tariff cut mentioned above.

Keep MARKET PERFORM. Although expecting lower earnings post- 2020, all negatives have priced in as share price have been supressed in the past two years over the concern of tariff cut. Thus, we keep our MARKET PERFORM rating at unchanged target price of RM16.45/SoP share. Our call is supported by c.4% yield. Upside risk to our call is higher-than-expected return of regulated asset base.

Source: Kenanga Research - 19 Feb 2019