INVESTMENT HIGHLIGHTS

• Petronas Gas Bhd (PetGas) 2QFY19 earnings came in marginally lower by -1.3%yoy at RM502.9m

• Earnings supported by Gas Processing and Utilities segment due to 2nd term Gas Processing Agreement

• Gas transportation and Regasification segment revenue and profit declined in line with IBR implementation

• Second interim dividend of 16sen declared

• Maintain NEUTRAL with an revised TP of RM16.26 per share

1HFY19 earnings above expectations. PetGas’ 2QFY19 earning was marginally lower by -1.3%yoy at RM502.9m. However, its 1HFY19 earnings came in at RM1,018.4m which is above our and consensus’ full-year FY19 earnings estimates at 56.5% and 55.1% respectively. Revenue during the quarter grew marginally by +1.6%yoy which can be largely attributed to increased contribution from gas processing and utilities arising from the higher reservation charge under the 2nd term Gas Processing Agreement (GPA) and upward fuel gas price revision respectively. The higher revenue was however, offset by lower revenue from gas transportation and regasification due to the new tariff under Incentive Based Regulation (IBR) which began in January this year.

Strong asset reliability at close to 100%. The sustained sales growth is largely attributable to: (i) excellent plant and operational performance and reliability (100% uptime for Gas Processing segment, near 100% uptime for Gas Transportation segment and near 100% uptime for Regasification segment); (ii) contribution of Performance Based Scheme from Gas Processing segment and; (iii) higher customer demand for all products and favourable selling prices for Gas Utility segment.

Gas processing. Segment revenue grew to RM427.1m (+8.1%yoy), whilst profit jumped by +27.2%yoy attributable to higher reservation charge under the 2nd term GPA and lower depreciation expense. Furthermore, the company’s gas processing plants achieved 100% asset reliability for the quarter and liquid plant extraction performance consistently exceeded targets throughout the quarter.

Gas transportation. Both segment revenue and profit contracted by -14.9%yoy and -19.0%yoy respectively in line with the lower gas transportation tariff under IBR. Gas transmission reliability was at near 100%. That said, segment profit margin improved to 73.5% from 69% last quarter.

Utilities. Segment revenue rose +14.3%yoy to RM352.4m driven by upward revision of fuel gas price on 1 July 2018 and 1 January 2019 coupled with additional surcharge on national electricity tariff. Meanwhile; segment profit surged by +46.8% year-over-year as the higher revenue was supported by favourable sales volume on customer demand for all products.

Regasification. Due to the implementation of IBR, segment revenue was flat year-over-year whilst profit was down by -10.6%yoy by higher depreciation upon recognition of jetty facilities at RGTP and higher plant operating expenses. Plant reliability in Sungai Udang and Pengerang was close to 100% during the quarter.

Second interim dividend of 16.0sen declared. PetGas also declared a second interim dividend of 16.0sen for the quarter under review which brings its year-to-date dividend declared to 32.0sen. This translates to a 2.1% yield to yesterday’s closing price and represents a 62% payout ratio out of its 1HFY19 51.0sen EPS.

Impact on earnings. Despite its 1HFY19 coming in above our expectations, we are making no changes to our FY19F earnings as we remain wary of the impact coming from the regulated business segments for now (i.e: gas transportation and regasification). However, we have reduced our FY20F earnings slightly by -0.3% to RM1,817.8m as incorporate higher CAPEX assumption of RM1.2b as guided by the Management in its analyst briefing held yesterday. The CAPEX is expected to be spent on refreshing and rejuvenating its second gas processing asset in FY20.

Maintain NEUTRAL. In-line with our earnings revision, we are maintaining our NEUTRAL recommendation on PetGas with a revised TP of RM16.26 (from RM17.23 previously). Our neutral recommendation is due to the recently implemented 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 a lower forward PER20 of 17.7x pegged to EPS20 of 91.9sen. The target PER is based on PetGas’ rolling four-quarter average PER over five years.

Source: MIDF Research - 28 Aug 2019