9MFY20 core profit of RM147.9m beat expectations on higher-than-expected sales volume as 3QFY20 volume rebounded back to pre-MCO level. This led us to upgrade FY20E earnings by 7% on higher sale volume but we keep FY21E earnings unchanged. As we believe most if not all near-term catalysts are already priced in, we keep our MP rating and TP of RM2.85/DCF share.

9MFY20 results beat expectations. At 82%/79% of house/street’s FY20 estimates, 9MFY20 core profit of RM147.9m came above expectations where the variance between our forecast and actual was due to stronger-than-expected sales volume rebounding back to pre- MCO level. 9MFY20 gas sales volume of 146.5m mmbtu forms 77% of our full-year assumption. There is no dividend declared during the period as expected as it usually pays half-yearly dividend.

Sequential earnings rebounded strongly as sales volume was back to pre-MCO level. Total sales volume including gas, NGV and LPG surged 12% QoQ to 53.2m mmbtu in 3QFY20 from 47.6m mmbtu after the MCO lockdown in 2QFY20 which led to similar proportion of percentage increase in revenue to RM1.72b. As such, 3QFY20 core profit leapt 23% to RM55.3m from RM44.8m in the preceding quarter. The core earnings were adjusted mainly for RM3.3m PPE write-off arising from stations for dismantled terminated client and upgraded stations. Meanwhile, share of associate incomes turned profitable at RM0.2m from loss of RM0.2m previously.

Improved YoY earnings on new retail margin. YoY, 3QFY20 core profit jumped 38% from RM40.2m, despite revenue dipping 2% on lower average natural gas tariff, solely attributable to higher margin spread after the inclusion of retail margin this year. Similarly, YTD 9MFY20 core earnings grew 13% to RM147.9m from RM130.4m in 9MFY19, although revenue contracted 7% to RM4.87b, due to the abovementioned new retail margin. Besides a lower average natural gas tariff, the decline in revenue was also partly attributed to a 3% drop in total sales volume to 150.6m mmbtu from 155.8m mmbtu previously.

Business as usual; volume growth to lead earnings higher. With 3QFY20 sales volume which is back to pre-MCO level, our earlier gas sales volume assumption for FY20 of -5% is deemed too conservative at 191.1m mmbtu. As such, we revised our FY20 gas volume growth assumption to -2% to 197.2m mmbtu but keep FY21 volume assumption at 213.5m mmbtu. Hence, we upgrade FY20 earnings by 7% while keep FY21 forecast unchanged. Correspondingly, FY20 NDPS is also raised proportionally based on unchanged 90% earnings pay-out ratio.

Positives priced in; keep MARKET PERFORM. We remain positive on its long-term earnings prospects given the margin spread of above RM2.00/mmbtu that will keep its earnings growing on the back of volume growth. However, we reiterate our MARKET PERFORM rating with unchanged DCF-derived target price of RM2.85, as we believe positives are already reflected in the share price. Our recommendation is supported by attractive dividend yield of c.5%. Upside risk to our call is a higher-than-expected volume growth.

Source: Kenanga Research - 13 Nov 2020