INVESTMENT HIGHLIGHTS

• Petronas Gas Bhd (PetGas) 4QFY18 reported earnings contracted by -32.9%yoy to RM342.4m

• Earnings supported by revenue growth of +4.9%yoy

• All business segments recorded sales growth

• Regasification revenue and earnings boost from Pengerang Regasification

• Fourth interim dividend of 22sen declared

• Maintain NEUTRAL with an unchanged TP of RM19.75 per share

Earnings met expectations. PetGas’ 4QFY18 reported earnings contracted by -32.9%yoy to RM342.4m despite a revenue growth of +4.9%yoy. This is due to share of losses from its joint-venture company Kimanis Power Sdn Bhd (KPSB) which was a result of derecognition of deferred tax assets (DTA) amounting to RM124.3m. Excluding the impact of the DTA, PetGas’s earnings would be lower by -8.6%yoy at RM466.7m attributable to a one-off impairment loss on assets and higher finance costs. FY18 earnings met expectations as it accounted for 97% of both our and consensus full year FY18 earnings estimates.

98% overall asset reliability. The sustained sales growth is largely attributable to: (i) excellent plant and operational performance and 98% overall asset 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 contracted marginally to RM390.2m (-1.4%yoy), whilst profit declined by -4.3%yoy attributable to higher depreciation expense following the completion of statutory plant turnarounds despite lower OPEX. That said, the company’s gas processing plants’ asset reliability remains at 100% during the quarter.

Gas transportation. Both segment revenue and profit decreased by -2.0%yoy and -20.0%yoy respectively in relation to operations and maintenance revenue from Sabah Sarawak Gas Pipeline. This resulted in segment profit margin to drop slightly to 69%. However, gas transmission reliability remains at near 100%.

Utilities. Segment revenue staged an increase of +11.6%yoy to RM340.6m due to favourable sales volumes on higher customer demand for electricity and industrial gasses, coupled with higher product prices in line with upward revision in fuel gas price. However, segment profit declined by -11%yoy due to higher cost of sales and higher depreciation due to completion of statutory turnarounds and capital 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 were higher by +15.2%yoy and +11.0%yoy respectively. Plant reliability in Sungai Udang and Pengerang was at 100% during the quarter.

Impact on earnings. No changes to earnings forecasts pending analyst briefing to be held today.

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on PetGas with an unchanged TP of RM19.75 pending the analyst briefing scheduled to be held today. Our neutral recommendation is due to the recently implemented Incentive Based Regulation (IBR) on setting the base tariff that was announced last December. That said, going forward 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 4.9% for FY19 and; (iii) strong potential capital upside, despite the recent revision implementation of the IBR pricing mechanism. 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 - 19 Feb 2019