9MFY20 results with earnings growing steadily by 10% to RM1.56b, beat our forecast slightly on lower opex. PGAS has shown earnings resiliency during this pandemic period owing to the IBR framework. Going forth, we see little earnings risk for the next three years on RP1 base tariffs. Nonetheless, all positives are already priced in for now, in our view. Thus, we continue to rate the stock a MP with unchanged SoP-TP of RM16.85.

9MFY20 results came in slightly above. At 79%/80% of house/street’s FY20 estimates. 9MFY20 core profit of RM1.56b came in slightly higher than expectations. The main deviation from our estimate is due to better-than-expected earnings from Gas Transportation (GT) and Regasification (RGT). It declared a 3rd interim NDPS of 18.0 sen (ex-date: 04 Dec; payment date: 22 Dec), totalling YTD 9MFY20 NDPS to 100.0 sen (including a special dividend of 50.0 sen paid in 2QFY20) vs. 50.0 sen paid in 9MFY19.

A small dip in sequential earnings. 3QFY20 core profit fell 3% QoQ to RM512.2m, despite revenue inching up 1%, largely attributable to a 52% or RM30.4m decline in associate income as its 60%-owned JV Kimanis IPP had a scheduled shutdown. Meanwhile, GT reported a 9% rise in operating profit to RM225.6m on lower internal gas consumption (IGC) cost which was offset by higher repair and maintenance costs while RGT posted a 29% jump in operating profit to RM216.0m on the back of lower opex. This led to group operating profit growing by 17% to RM832.9m.

A steady growth from last year. YoY, 3QFY20 core profit leapt 15% from RM446.4m, while revenue rose 5% from RM1.34b. This was due to improved results from all business segments. Gas Processing (GP) posted 26% rise in EBIT on lower opex while GT earnings rose 12% on lower IGC and other opex. Meanwhile, Utilities saw its EBIT jumping 3x on higher revenue coupled with lower depreciation charges while higher base tariffs effective Jan this year pushed RGT earnings higher by 40%. YTD, 9MFY20 core profit rose 10% to RM1.56b on the back of 3% rise in revenue coupled with a 9% decline in depreciation charges while associate incomes was higher by 8%.

IBR to safeguard earnings. Even during this pandemic period, PETGAS has shown its earnings resiliency in the past three quarters thanks to the IBR framework to safeguard its earnings. 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 3QFY20 results, we raised FY20 earnings estimate by 3% to reflect higher earnings from GT and RGT in 3QFY20 but keep FY21 forecasts unchanged. No changes in FY20 NDPS forecast as well.

Maintain MP for earnings resilient and decent yield. We continue to like its business model which provides high earnings certainty, but its share price has already priced in the positives; thus, we maintain our MARKET PERFORM call on the stock with unchanged SoP-target price of RM16.85 share. Our call is also supported by a decent regular annual dividend yield of c.5%. Upside risk to our call is a higher-than- expected business volume for non-regulated business

Source: Kenanga Research - 20 Nov 2020