1QFY21 core profit of RM554.3m came slightly above expectations on the back of continued cost rationalisation and interest cost savings from the capital restructuring exercise. Operationally, top-lines were fairly on track thanks to the regulated business framework which proved its earnings resiliency even during this pandemic period. Recent price weakness offers accumulation opportunity, and coupled with >5% yield, we upgrade the stock to OP with a slightly higher TP of RM17.06.

1QFY21 results slightly above. At 29%/28% of house and street’s FY21 full-year estimates, 1QFY21 core profit which jumped 25% sequentially to RM554.3m came in slightly above expectations owing to lower than expected opex and finance costs. Meanwhile, it declared 1st interim NDPS of 16.0 sen (ex-date: 10 Jun; payment date: 21 Jun) which is the same as 16.0 sen paid in 1QFY20 but lower than that of a total of 27.0 sen (22.0 sen interim and 5.0 sen special) paid in the preceding quarter.

Lower opex boosted earnings higher. 1QFY21 core profit leapt 25% QoQ to RM554.3m, despite revenue dipping 4%, primarily owing to broad-base lower opex across all business segments partly on the effect of cost rationalisation efforts. In addition, 4QFY20 results were partly impacted by higher opex. Gas Transportation’s (GT) and RGT’s operating profits jumped 14% and 20% on lower internal gas consumption (IGC) cost. Meanwhile, interest cost continued to trend lower on capital restructuring exercise which saw 1QFY21 interest expenses falling 26% to RM41.8m. Associate incomes also jumped 59% to RM45.0m on higher GASMSIA’s earnings while Kimanis IPP benefited from favourable forex on forward contract.

Lower financing cost. YoY, 1QFY21 core profit rose 7% from RM520.0m in 1QFY20 although revenue declined 4% over the year. Despite leading the group revenue lower on lower product prices, Utilities posted a 127% jump in operating profit to RM74.8m on favourable margin due to lower fuel gas cost as well as lower depreciation charges. Other business segments also reported improved earnings on lower opex as mentioned above. Meanwhile, the capital restructuring exercise, such as PLNG2 RM1.7b Sukuk and PETGAS securing a RM1.3b Islamic financing facility from RHB, led interest costs lower by 23% to RM41.8m from RM54.4m previously.

IBR to safeguard earnings. In the past one year, PETGAS displayed earnings resiliency, unaffected by the pandemic as the IBR framework provides safeguard for its earnings for 2020-2022 under the RP1. As such, earnings for GT, Gas Processing and RGT are fairly predictable while Utilities is dependent on operational efficiency. The new RM541m gas pipeline project to cater for an IPP in Pulau Indah should be a new earnings growth avenue in RP2 when the project is ready in 1QFY23. Besides, cost rationalisation will help to improve efficiency and thus better profitability.

Upgrade to OUTPERFORM. Post results, we fine-tuned FY21-FY22 earnings estimates upward by 7%/6% as we lowered opex as well as interest cost assumptions. Correspondingly, NDPS is also adjusted proportionally based on unchanged 85% payout. This also led to a slightly higher SoP-driven target price of RM17.06 from RM16.97. As the recent price weakness is presenting buying opportunity coupled with its sustainable >5% dividend yield, we upgrade the stock to OUTPERFORM from MARKET PERFORM. Risk to our call is lower- than-expected business volume for non-regulated business.

Source: Kenanga Research - 27 May 2021