FY20 results with earnings growing steadily by 6% to RM2.00b matched expectations but NDPS beat forecasts on additional special dividend. PETGAS has shown earnings resiliency during this pandemic period thanks to the IBR framework and this will go on for the next two years until RP1 ends in 2022. Nonetheless, with limited earnings growth and all positives seemingly already priced in, it remains as MP albeit with a higher TP of RM16.97.

FY20 results matched expectations. FY20 results came in within expectations with core profit rising 6% to RM2.00b which was 1% below house as well as market consensus. It declared a total NDPS of 27.0 sen (4th interim NDPS of 22.0 sen, 2nd special dividend of 5.0 sen, ex-date: 09 Mar; payment date: 22 Mar), totalling FY20 NDPS to 127.0 sen (72.0 sen regular and 55.0 sen special) vs. 82.0 sen (72.0 sen regular and 10.0 sen special) paid in FY19 which beat our FY20 forecast of 122.0 sen.

Higher opex dented sequential earnings. Despite the miniscule 1% dip in revenue, 4QFY20 core profit declined 14% QoQ to RM442.1m from RM512.2m due to higher opex for Gas Transportation (GT) and RGT segments on higher internal gas consumption (IGC) and repair and maintenance costs which saw GT and Utilities earnings falling 23% and 24%, respectively. However, the contraction in earnings was mitigated by lower taxation and MI of 29% and 64%, respectively. The dip in revenue was mainly attributable to a 6% decline in Utilities revenue owing to lower excess electricity sold.

A steady growth from last year. YoY, 4QFY20 core profit fell 6% from RM472.0m in 4QFY19 largely due to lower taxation and MI previously. In fact, at PBT level, earnings grew 6% to RM521.0m, on the back of 1% hike in revenue, owing to lower opex for its Utilities, RGT and Gas Processing (GP) segments while Utilities also benefited from higher base tariff which pushed earnings higher by 60%. In addition, associate income was also higher by 86% YoY or RM13.1m. YTD, FY20 core profit rose 6% to RM2.00b while revenue inched up 2%. The improvement was attributable to the same reasons of lower opex for Utilities, RGT and GP segments. Besides, earnings were also helped by lower depreciation by 11% and higher associate income by 17%.

IBR to safeguard earnings. In the past one year (FY20), PETGAS has shown its earnings resiliency by not affected by the pandemic as the IBR framework safeguarded its earnings for 2020-2022 under the RP1. As such, earnings for GT, GP and RGT are fairly predictable while Utilities is dependent on operational efficiency. Having said that, earnings certainty is high albeit with limited earnings growth prospects. While we keep FY21 forecasts unchanged, we launched our new FY22 estimates with 1% earnings growth. Our NDPS for both FY21-FY22 is based on 85% earnings payout ratio.

Reiterate MARKET PERFORM for its above average yield. We reckon that its business model provides high earnings certainty, but all positives have already priced in. Thus, we maintain our MARKET PERFORM call on the stock albeit with a higher SoP-driven target price to RM16.97 from RM16.85 share as we rolled over valuation base to FY21. Our call is also supported by a decent regular annual dividend yield of >5%. Upside risk to our call is a higher-than-expected business volume for non-regulated business.

Source: Kenanga Research - 23 Feb 2021