9MFY21 results came in line as the strong 3QFY21 core profit of RM589.9m was largely due to a solid RGT earning on lower IGC cost which may not be repeatable. Having said that, we still like its earnings resiliency but near-term positives are already factored in its share price. Thus, we downgrade the stock to MP with a lowered TP of RM17.02.

3QFY21 results within expectations. At 76%/79% of house and street’s FY21 full-year estimates, 9MFY21 core profit which rose 2% to RM1.58m matched expectations. Meanwhile, it declared 3rd interim regular NDPS of 18.0 sen (ex-date: 06 Dec; payment date: 20 Dec) in 3QFY21 vs. 16.0 sen paid in 2QFY21 and 18.0 sen paid in 3QFY20. This totalled 9MFY21 NDPS to 50.0 sen as opposed to 100.0 sen (50.0 sen regular and 50.0 sen special) distributed in 9MFY20.

Earnings normalised sequentially. 3QFY21 core profit rebounded strongly by 35% QoQ to RM589.9m from RM438.6m in 2QFY21 while revenue rose 3% as earnings normalised from the previous quarter which was hit by broad-base higher opex across all segments. RGT’s earnings jumped 94% to RM268.9m owing to lower internal gas consumption (IGC) cost partly on adjustment for overstating in 2QFY21 while Gas Processing’s (GP) EBIT recovered 15% to RM245.2m as it was hit by higher depreciation previously. Gas Transportation’s (GT) operating profit grew 15% after higher maintenance cost in 2QFY21 while profit for Utilities rose 5% to RM73.6m on higher sales volume. Meanwhile, share of associate and JV incomes leapt 49% to RM38.7m as there was a higher provision of tax at Kimanis Power in the preceding quarter.

RGT and Utilities led earnings growth. YoY, 3QFY21 core profit jumped 15% from RM512.2m in 3QFY20 though revenue inched up only 1%. The improved results were largely driven by: (i) strong RGT earnings on lower IGC cost as mentioned above as well as utilities cost, and (ii) Utilities segment earnings which were boosted by lower depreciation expense attributable to fully depreciated assets which are still in use. YTD, 9MFY21 core profit rose 2% to RM1.58b, despite revenue dipping 1%, which was also largely led by higher RGT earnings on lower utilities cost while Utilities earnings were helped by lower depreciation charges as mentioned above.

Forward earnings to stay resilient. While 4QFY21 results could be weaker as the strong RGT earnings in 3QFY21 may not be repeatable and the one-off prosperity tax will impact FY22 negatively, the IBR framework provides safeguard to its earnings for 2020-2022 under the RP1. 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, it has announced a non-binding expression of interest for a potential development of additional LNG storage tank in Pengerang, could be a new earnings kicker.

In the price; cut to MP. Post results, we keep FY21 estimates unchanged but cut FY22 forecast by 6% to reflect the one-off prosperity tax. This leads to a lower SoP-driven TP of RM17.02 from RM17.06. On the other hand, while we still like its resilient earnings profile, we cut the stock to MP from OP following the recent price movement which has priced in the fundamentals. However, the MP rating is supported by a sustainable >5% dividend yield. Risk to our downgrade is higher than-expected business volume for non-regulated business.

Source: Kenanga Research - 23 Nov 2021