Although results were sequentially lower by 21%, owing to higher opex, 2QFY21 core profit of RM438.6m still met expectations. With the RP1 at half-time, PETGAS has so far demonstrated earnings resiliency even during this pandemic period. As such, this also makes its above-average dividend yield of >5% sustainable. We keep our OUTPERFORM rating and target price of RM17.06 unchanged.

2QFY21 results in line. At 48%/49% of house and street’s FY21 full-year estimates, 1HFY21 core profit which dipped slightly by 5% to RM992.9m came within expectations. Meanwhile, it declared 2nd interim regular NDPS of 16.0 sen (ex-date: 07 Sep; payment date: 20 Sep) which is the same as 16.0 sen paid in 1QFY21 but lower than that of a total of 66.0 sen (16.0 sen regular and 50.0 sen special) paid in 2QFY20. This totalled 1HFY21 NDPS to 32.0 sen as opposed to 82.0 sen (32.0 sen regular and 50.0 sen special) distributed in 1HFY20.

Higher opex crimped sequential results. While revenue rose 3% which was led by Utilities on higher product prices, 2QFY21 core profit contracted 21% QoQ to RM438.6m, largely due to higher opex across all business segments. As such, Gas Processing’s (GP) operating profit  fell 13% to RM212.7m on higher depreciation, Gas Transportation’s (GT) EBIT declined 10% to RM178.5m due to higher maintenance cost, RGT’s earnings tumbled 30% to RM138.4m owing to higher internal gas consumption (IGC) cost and profit for Utilities slid 6% to RM70.1m on higher fuel cost. Meanwhile, share of associate and JV incomes plunged 42% to RM26.0m due to higher provision of tax at KimanisPower.

A mixed bag of results, YoY. 2QFY21 core profit declined 17% YoY from RM526.7m, with revenue dipping 1%, which was due to similar reasons i.e. higher opex as mentioned above for higher depreciation,maintenance and IGC costs that overwhelmed a 40% jump in Utilities earnings due to lower fuel gas costs and lower depreciation charges. Nonetheless, interest costs were significantly lower by 26% due to capital restructuring exercise. YTD, 1HFY21 core profit fell 5% to RM992.9m from RM1.05b where the higher profits of RGT and Utilities by 1% and 74% on higher revenue, and lower fuel gas costs and lower depreciation expense helped to offset lower earnings from GP and GT by 3% and 5% on higher depreciation and maintenance charges as mentioned above. Meanwhile, interest cost also lowered by 25%, benefiting from the capital restructuring exercise.

IBR to safeguard earnings. PETGAS has displayed earnings consistency in the past one year given the IBR framework which has provided safeguard to its earnings for 2020-2022 under the RP1, unaffected by the pandemic. As such, earnings for GT, Gas Processing and RGT which are regulated 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.

OUTPERFORM for its earnings resiliency and decent yield, which are supported by the IBR framework for the regulated business of GP, GT and RGT businesses. Post results, we keep our forecast unchanged. The stock remains an OUTPERFORM with unchanged target price of RM17.06/SoP share which is supported by a sustainable >5% dividend yield. Risk to our recommendation is lower-than-expected business volume for non-regulated business.

Source: Kenanga Research - 24 Aug 2021