Investment Highlights

• Petronas Gas Bhd (PetGas) recorded slight earnings contraction in 3QFY17

• Cumulative 9MFY17 however grew by +2.5% to RM1.3b

• Gas transportation and regasification segment recorded growth for both revenue and operation profit

• Third interim dividend of 16sen per share declared

• Cumulative dividend at 47sen per share

• Upgrade to BUY with unchanged TP of RM20.00 per share

Commendable overall earnings performance. Despite recording marginal 3QFY17 earnings decline of -1.2%yoy to RM417.4m, PetGas continues to maintain sales growth of +0.5%yoy. The slight decline in earnings is attributable to heavier-than-usual depreciation of RM254.9m (RM231.4m in 3QFY16) during the quarter in line with the completion of capital projects and higher utilities costs. 9MFY17 cumulative earnings came in on target, making up 71.3% and 73.7% of our and consensus full year FY17 earnings estimates.

Sustained sales growth. The sustained sales growth is largely attributable to: (i) excellent plant and operational performance and reliability (+99% uptime for Gas Transportation and Regasification); (ii) contribution of Performance Based Scheme from Gas Processing segment and; (iii) favourable selling prices for Gas Utility segment.

Gas processing. The segment profit declined of -4.5% to RM486.5m is largely attributable to high depreciation expenses from the completion of several capital projects. Overall Gas Processing liquid plant extraction performance was sustained above target. The plant reliability performance is at 99%.

Gas transportation. Both segment revenue and profit expanded by +0.8%yoy and +2.0%yoy respectively as gas transmission reliability was at near 100%. Segment profit margin expanded by +0.9ppts yoy to 77.5%.

Utilities. Segment revenue staged a jump of +10.4%yoy to RM862.5m but segment profit declined by -5.0%yoy as favourable selling prices and higher demand for electricity and steam was negated by higher cost of sales.

Regasification. Both segment revenue and profit performed comparatively well as revenue increased by +2.9%yoy and profit by +6.8%yoy. The commendable numbers are attributable to high reliability of 99% and higher storage fees from favourable USD/MYR rates coupled with higher throughput volume.

Impact on earnings. No changes to earnings forecasts.

Upgrade to BUY. We are upgrading our stance on PetGas to BUY with an unchanged TP of RM20.00 as we are of the opinion that the company will continue to perform premised on: (i) strong and diversified income stream; (ii) expected strong national GDP of 5.1% and 5.5% for FY17 and FY18 respectively and; (iii) strong potential capital upside. Our valuation is premised on forward PER18 of 21.2x pegged to EPS18 of 94.4sen. The target PER is based on PetGas’ rolling four-quarter average PER over six years.

Source: MIDF Research - 13 Nov 2017