1HFY20 results, which beat our estimates slightly, grew steadily on the back of the IBR framework. A pleasant surprise was the 50.0 sen special dividend. Going forth, we see little earnings risk for the next three years on RP1 base tariffs. Nonetheless, we believe all positives are already priced in for now. Thus, the stock remains MP with revised SoP-TP of RM16.85.

1HFY20 results beat expectations. At 55%/58% of house/street’s FY20 estimate, 1HFY20 core profit of RM1.05b came slightly higher than our estimate but beat market consensus. The main deviation to our estimate was better-than-expected associate income and a lower than-expected MI. Nonetheless, operational earnings from all business segments were well on track. It declared a surprise special dividend of 50.0 sen on top of 2nd interim regular NDPS of 16.0 sen (both dividends ex-date: 08 Sep; payment date: 01 Oct) totalling 1HFY20 NDPS to 82.0 sen vs. 32.0 sen paid in 1HFY19.

Flattish sequential result. 2QFY20 core profit inched up 1% QoQ to RM526.6m from RM520.0m in 1QFY20 while revenue was flat at RM1.40b. Although top-lines were flat, all business segments reported higher operating profits due to lower operating costs with Gas Processing (GP) up 12%, Gas Transportation (GT) grew 10%, Utilities jumped 53% while RGT inched up 2%. On the other hand, associate income expanded 29% to RM58.3m from RM45.2m largely due to Kimanis IPP while it reported a share of profit at MI of RM26.6m from a share of loss of RM20.1m in 1QFY20.

A steady yearly growth numbers. YoY, 2QFY20 core profit rose slightly by 4% from RM507.7m in 2QFY19 on the back of 1% hike in revenue. Segmental-wise, EBIT of GP and RGT rose 15% and 6%, respectively, as GP benefited from lower opex while higher base tariffs effective Jan this year pushed RGT earnings higher. However, GT posted lower earnings by 4% largely due to lower net tariff excluding internal gas consumption (IGC) while Utilities earnings contracted 15% on lower electricity sales volume. YTD, 1HFY20 core profit rose 8% to RM1.05b while revenue grew 2%. The improved 1HFY20 results were also due to same reason as quarterly results with higher GP and RGT earnings which mitigated lower GT and Utilities earnings.

IBR to safeguard earnings. So far, the 1HFY20 results already showed that business volume has little impact from COVID-19-led slowdown as PETGAS is an essential needs provider while volume should improve further as economic activities have generally restarted. 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 albeit with limited earnings growth prospects. Post 2QFY20 results, we fine-tune FY20/FY21 estimates upward slightly by 3%/2% for adjustment on MI and associate income. We raised FY20 NDPS to 122.0 sen from 72.4 sen for the 50.0 sen special dividend while FY21 NDPS is also increased to 83.5 sen from 72.5 sen on 85% pay-out assumption from 75%.

Keep MARKET PERFORM for earnings resilient and decent yield. While we like its business model providing high earnings certainty, its share price has already priced in the positives; thus, we maintain our MARKET PERFORM call on the stock with a lower SoP-target price of RM16.85 share from RM17.20 share which is adjusted for: (i) higher NDPS by 49.6 sen, (ii) higher target price for GASMSIA (MP; TP: RM2.85) of RM2.85 from RM2.80, and (iii) change in cash balance on earnings revision. Our call is also supported by the 50.0 sen special dividend while the regular annual dividend yield is fairly decent at c.5%. Upside risk to our call is a higher-than-expected business volume for non-regulated business

Source: Kenanga Research - 21 Aug 2020