1QFY20 results met expectation with core profit rising 10% sequentially to RM520.0m, helped partially by higher RGT tariff. With the RP1 base tariffs, we see little earnings risk for the next three years. The recent share price weakness offers good buying opportunity into this resilient stock with decent yield of c.5%. Thus, we upgrade the stock to OP with revised SoP-TP of RM17.20/share.

1QFY20 results met our expectation. At 27%/29% of house/street’s full-year FY20 estimate, 1QFY20 core profit of RM520.0m matched our estimate but slightly higher than market consensus which we believe may not have fully adjusted for the new base tariffs under Regulatory Period 1 (RP1) which started in Jan 2020. The core profit was largely adjusted for RM152.0m unrealised forex loss. It declared 1st interim NDPS of 16.0 sen (ex-date: 12 Jun; payment date: 30 Jun) for 1QFY20 which is the same as 1QFY19 but lower than the 32.0 sen paid in 4QFY19.

RGT led sequential results … 1QFY20 core profit grew 10% QoQ to RM520.0m from RM472.0m in 4QFY19, on the back of 2% rise in revenue, largely due to higher earnings from: (i) RGT by RM24.5m or 18% on higher base tariffs, and (ii) Gas Processing (GP) by RM16.5m or 8% on RM20.5m performance incentive. Meanwhile, Gas Transportation (GT) posted slightly higher operating profit by 3% while Utilities saw its earnings declining RM11.4m or 26% due to lower sales volume of electricity. Elsewhere, associate income normalised to RM45.2m from RM15.2m largely due to Kimanis IPP while it reported a share of loss at MI of RM20.1m from a profit of RM7.7m.

… and GP as well. YoY, 1QFY20 core profit leapt by 14% from RM457.9m while revenue rose a marginal 2%. The rise in earnings was on the similar reasons as RGT benefited from higher base tariffs while the RM20.5m performance incentive pushed GP earnings higher. However, GT posted lower earnings by 6% largely due to lower net tariff excluding internal gas consumption (IGC) while Utilities earnings fell 28% or RM12.6m on lower sales volume as mentioned above. Meanwhile, the Kimanis IPP-led associate income was comparatively flat at RM45.2m from RM39.2m.

MCO has minimal impact on its earnings. We expect little impact from COVID-19-led slowdown as PETGAS is an essential needs provider while the business volume should improve as businesses reopen. The regulated tariff rate in RP1 in 2020-2022 ensuring earnings certainty over the next three years. With earnings clarity after the RP1 announcement, focus will revert to its operational efficiency especially for Utilities as earnings for GT, GP and RGT are fairly predictable. As such, earnings certainty is high but with limited earnings growth prospects. Post-1QFY20 results, we keep our estimates unchanged for now.

Upgrade to OUTPERFORM on price weakness. With high earnings certainty, as demonstrated in 1QFY20 results, we decided to switch back to earnings-based SoP valuation from PBV previously used in our Utilities Sector Report: Keep It Flowing dated 02 Apr. As such, our target price is switched back to RM17.20/share from RM16.25 based on -1SD 5-year PBV of 2.43x. With its share price falling 7% in the past three months, we see value re-emerging; thus, we raise the stock to OP from MP, with a decent yield of c.5%. Risk to our call is weakerthan-expected earnings.

Source: Kenanga Research - 21 May 2020