• Petronas Gas Bhd’s (PetGas) 4QFY16 earnings improved by +12.2%yoy to RM465.1m

• Sales remain stable, rising marginally by +1.5%yoy to RM1.15b

• All business segments recorded increase in quarterly revenue over a year earlier

• Cumulative FY16 dividends declared totalled 62sen

• Maintain NEUTRAL with unchanged TP of RM19.64

Keeping pace with estimates. PetGas’ 4QFY16 earnings improved by +12.2%yoy to RM465.1m premised on an increase in sales of +1.5%yoy to RM1.15b. The increase in sales is largely attributable to upward fuel gas price revision, but was partially negated by lower regasification revenue. The group’s full year FY16 normalised earnings (excluding forex gain of RM12.9m) of RM1,739.1m kept pace with our and consenses full year earnings estimates, accounting for 96% and 99% of full year earnings forecasts respectively.

Gas processing. Despite FY16 segment revenue rising by +1.5%yoy to RM1.56b, segment gross profit declined by -7.0%yoy to RM648.4m. Segment margin for 4QFY16 continue to decline for the third consecutive quarter to 35.9%. Subsequently, FY16 segment margin contracted by -3.8ppts to 41.6%. The increase in sales was attributable to higher performance based structure income while the decline in profitability was largely due to higher repair and maintenance costs coupled with depreciation expenses.

Gas transportation. FY16 segment revenue declined marginally by -0.6%yoy to RM1.30b due to the downwards revision of Gas Transportation Sabah tariff in 2QFY16. Segment profit also declined to RM975.3m due to higher land assessment fees and depreciation expenses. Segment margin contracted by -2.1ppts to 74.8%.

Utilities. FY16 revenue for the Utilities segment rose by +9.8%yoy to RM1.1b while segment profit leaped by +14.8%yoy to RM155.9m. Although revenue increased due to higher average sales prices, the effect was offset by higher operating costs.

Regasification. Overall revenue remained flat year-over-year at RM631.2m while segment gross profit shrank by - 3.8%yoy to RM286.3m. The decline in profitability is largely due to repair and maintenance costs to improve asset integrity.

Impact on earnings. No changes to earnings forecasts.

Maintain NEUTRAL. We are maintaining our NEUTRAL stance on PetGas with an unchanged FY17 TP of RM19.64 per share. Our TP is premised on forward PER17 of 21.2x pegged to EPS17 of 92.6sen. The target PER is based on PetGas’ rolling four-quarter average PER over six years. The stock price movement of PetGas has been fairly resilient, trading sideways within the band of RM20-23 per share since mid-August 2014 despite the >-50% drop in global crude oil prices and the subsequent moderate rebound in 2QFY15.

Source: MIDF Research - 24 Feb 2017