INVESTMENT HIGHLIGHTS

• Petronas Gas Bhd (PetGas) 2QFY18 earnings grew by +19.7%yoy to RM509.3m

• Earnings supported by strong revenue growth of +15.7%

• All business segments recorded sales growth

• Regasification revenue and earnings boost from Pengerang Regasification

• Second interim dividend of 16sen declared

• Maintain BUY with unchanged TP of RM20.00 per share

Strong asset reliability at 99%. PetGas’ 2QFY18 earnings grew by +19.7%yoy to RM509.3m premised on stable revenue growth of +15.7%yoy to RM1.36b (another record high). The record sale was largely attributable to increased contribution from the completion of tower two in its Pengerang Regasification facility which began operations mid-4QFY17. In addition, high asset reliability above 99% coupled with higher selling prices and higher performance based income supported revenue and earnings growth. 6MFY18 earnings accounted for 53.1% and 52.8% of our and consensus full year FY18 earnings estimates respectively.

Sustained sales growth. The sustained sales growth is largely attributable to: (i) excellent plant and operational performance and reliability (100% uptime for Gas Processing segment, 100% uptime for Gas Transportation segment and 100% uptime for Regasification segment); (ii) contribution of Performance Based Scheme from Gas Processing segment; and (iii) favourable selling prices for Gas Utility segment.

Gas processing. Segment revenue grew marginally at RM395.2m (+2.0%yoy), whilst profit rose by +6.2%yoy attributable to higher PBS income and lower OPEX. Additionally, the company’s gas processing plants achieved 100% asset reliability for the quarter. Profit margin expanded by +2.4ppts on a quarterly sequential basis.

Gas transportation. Both segment revenue and profit expanded by +5.1%yoy and +6.3%yoy respectively as gas transmission reliability was at near 100%. Segment profit margin remains stable at 77.2%.

Utilities. Segment revenue staged an increase of +5.0%yoy to RM308.3m however; segment profit declined by -5.3%yoy due to higher cost of sales and higher depreciation following the completion of several projects.

Regasification. Both segment revenue and profit were boosted by the completion of second tank in its Pengerang Regasification facility terminal on 9 April 2018. Revenue and profit increased by +88.1%yoy and +141.1%yoy respectively. Plant reliability in Sungai Udang and Pengerang was close to 100%.

Impact on earnings. No changes to earnings forecasts. Key downside risk to our earnings forecasts is the potential downward revision of its tariff which will significantly impact earnings. That said, our status quo is premised on the fact that we opine that the tariff will not be drastically altered. Instead, it will be reduced in a gradual manner over time.

Maintain BUY. We are maintaining our BUY recommendation on PetGas with a revised TP of RM20.44 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 5.5% for FY18; and (iii) strong potential capital upside. Our valuation is premised on forward PER19 of 21.2x pegged to EPS19 of 96.4sen. The target PER is based on PetGas’ rolling four-quarter average PER over six years.

Source: MIDF Research - 16 Aug 2018