The 1Q19 results, with core profit falling 4% YoY, matched expectations, reflected the tariff cut under the Pilot Regulatory Period in 2019. It is crucial as tariff will be cut further when the official RP1 starts next year. With share price falling 15% YTD, we believe all negatives should have been priced in by now. Thus, MP call is best for now with revised TP of RM16.55/SoP share. The call is supported by decent yield of c.4%

1Q19 inline. 1Q19 results matched expectation with core profit rising 39% sequentially to RM457.8m that accounted for 24% each of house and street’s FY19 full-year estimates. It announced 1st interim NDPS of 16.0 sen (ex-date: 18 Jun; payment date: 27 Jun) in 1Q19, which is the same as the 1st interim NDPS paid in 1Q18 but lower than 22.0 sen final NDPS paid in 4Q18.

Back on track. After a disappointing 4Q18 which was distorted by losses from associate Kimanis IPP on de-recognition of deferred tax assets amounting to RM124.3m, 1Q19 results were back to normalised level with core profit leaping 39% QoQ to RM457.8m from RM328.3m in the preceding quarter. Segmental-wise, both Gas Transportation (GT) and RGT saw EBIT falling 14% and 7%, respectively, to RM200.0m and RM157.7m, following the new lower tariff rates under the IBR for the Pilot Regulatory Period in Jan-Dec 2019. In RGT segment, RGT Pengerang saw lower tariff rates whereas RGT Melaka managed to get a higher tariff rate.

Tariff cut dampened earnings growth. 1Q19 core profit fell 4% YoY to RM457.8m while revenue inched up slightly by 1%, The decline in earnings was largely due to tariff rates cut for GT and RGT Pengerang as mentioned above for the Pilot Regulatory Period. As such, operating profit for GT and RGT fell 23% and 9%, respectively. In addition, GT’s results were also impacted by higher maintenance costs while higher depreciation for RGT Pengerang’s jetty facility also dragged RGT’s earnings. On the flipside, earnings for Gas Processing jumped 21% on the back of higher revenue by 8% as well as on lower opex. Meanwhile, earnings at Utilities were fairly flattish.

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. In all, we keep our FY19-FY20 estimates unchanged where we have factored in a basetariff cut in 2020 as mentioned above.

Maintain MARKET PERFORM. Share price has fallen 10% in the past three months which is now closer to our target price and we believe all negatives should have been priced in by now. Thus, we maintain our MARKET PERFORM rating at revised target price of RM16.55/SoP share, implying FY20E PER of 20x, from RM16.45/SoP share, as we roll over the valuation base-year to FY20 from FY19. 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 - 29 May 2019