FY19 core earnings, which rose 4% YoY to RM1.88b came within expectations, with expected lower operational results given the base tariff cut in Pilot RP. With the base tariff RP1 already announced with a smaller cut than expected, we expect low share price volatility for now as well as flattish earnings growth for the next three years. Thus, keeping MP rating with revised TP of RM17.20/SoP share. The stock is supported by decent yield of >4%.

FY19 results within expectations. FY19 results were satisfactory with core profit rising 4% YoY to RM1.88b which came 2% below our estimate and 1% above market consensus. It declared a total NDPS of 32.0 sen (ex-date: 04 Mar; payment date: 26 Mar), inclusive of 4th interim NDPS of 22.0 sen and special NDPS of 10.0 sen, totalling YTD FY19 NDPS to 82.0 sen from 72.0 sen paid in FY18. The total NDPS payout is also higher than our forecast of 68.3 sen as we had expected an earnings payout of 70% vs. actual regular payout of 76% or actual total payout of 86.1%.

Sequential results improved on Utilities rebounding from maintenance. 4QFY19 core profit rose RM472.0m from RM446.6m in 3QFY19 on the back of 3% rise in revenue, largely attributed to a 3-fold jump in Utilities to RM44.3m from RM11.1m as earning normalised after the completion of statutory turnaround at one of the Air Separation Unit in Kertih. Meanwhile, Gas Processing (GP) posted 5% growth (or RM9.7m) in earnings due to higher Performance Base Structure revenue while Gas Transportation (GT) reported 9% (or RM19.0m) lower earnings owing to lower business volume. In all, overall earnings were partly weighed on lower associate’s income by 58% or RM20.7m which was largely due to Kimanis IPP.

Yearly earnings were impacted by tariff cut operationally. On a YoY comparison, 4QFY19 and full-year FY19 core profits rose 52% and 4% to RM472.0m and RM1.88b, respectively, as last year’s earnings were hit by RM124.3m de-recognition of deferred tax assets in 4QFY18 from associate Kimanis IPP. However, operationally, revenue dipped 1% in both periods as GT and RGT were impacted by tariff rates cut for the Pilot Regulatory Period in 2019. As such, earnings for GT fell 21% in both 4QFY19 and FY19 while RGT saw earnings declining 17% and 12% in 4QFY19 and FY19, respectively.

RP1 tariff rate settled; flattish earnings for the next three years. The effective base tariff cut in Regulatory Period 1 (RP1) which started in Jan and spread over the next three years is smaller than expected. We expect base tariff to fall by 20% from the pre-RP of RM1.248/GJ in 2018 to RM1.000/GJ in 2026 against our previous assumption of a 60% cut to RM0.502/GJ. As the base tariff for RP1 is already confirmed, we expect less share price volatility for the next three years. For now, while we keep our FY20 estimates unchanged, we upgraded NDPS to 72.4 sen from 67.6 sen as earnings payout is raised to 75% from 70%. We also introduce flattish FY21E earnings of RM1.91b with same dividend payout of 75%.

Reiterate MARKET PERFORM. With earnings clarity after the RP1 announcement, focus will revert to its operational efficiency especially for Utilities as earnings for GT and GP are fairly predictable. As such, earnings certainty is high but with limited earnings growth prospects. Thus, we keep our MARKET PERFORM rating unchanged with a revised target price of RM17.20/SoP share from RM17.60/SoP share after fine-tuning: (i) GT & GP relating to FY19A growth, and (ii) net cash position on FY19A balance sheet and FY20E new NDPS adjustment. The stock is supported by a decent yield of >4%. Upside risk to our call is higher-than-expected earnings.

Source: Kenanga Research - 19 Feb 2020