KEY INVESTMENT HIGHLIGHTS

• PGB’s 3QFY19 earnings dipped by -13.6%yoy to RM431.6m attributable to lower revenue from gas processing and utilities segments

• Statutory turnaround at Kerteh’s air separation unit dragged Utilities segment’s performance

• Close to 100% plan reliability recorded across its business segments during the quarter

• Third interim dividend of 18sen declared

• Maintain NEUTRAL with unchanged TP of RM16.26 per share

PGB’s 3QFY19 earnings of RM431.6m came in above expectations. Petronas Gas Berhad’s (PGB) 3QFY19 net profit came in at RM431.6m. This brings it 9MFY19 cumulative earnings to RM1,449.9m which is above our but within consensus’ full-year earnings estimates at 80.4% and 78.4% respectively. Comparing against 3QFY18, revenue and earnings dipped by -4.5% and -13.6%yoy respectively. Meanwhile, on a quarterly sequential basis revenue and earnings declined by - 3.1%qoq and -14.2%qoq respectively. This was mainly attributable to lower revenue recognised from its gas transportation as well as; utilities segments during the quarter.

Strong asset reliability at close to 100%. Despite lower revenue and earnings registered year-over-year during the quarter; its financial performance remains largely intact due to: (i) excellent plant and operational performance and reliability (close to 99% uptime for Gas Processing segment, near 100% uptime for Gas Transportation segment and near 100% uptime for Regasification segment) and; (ii) contribution of Performance Based Scheme from Gas Processing segment.

Gas processing. Segment revenue grew by +7.8%yoy to RM422.4m during the quarter primarily driven by the higher reservation charge under the 2nd term Gas Processing Agreement which was effective on 1st January 2019. Meanwhile, the segment results surged by +31.7%yoy due to higher revenue coupled with lower depreciation expenses. Furthermore, the Group’s processing plants also achieved close to 99% reliability during the quarter.

Gas transportation. Both segment revenue and profit contracted by - 15.2%yoy and -22.4%yoy respectively in line with the lower gas transportation tariff under IBR. Gas transmission reliability was at near 100%. Correspondingly, the segment’s profit margin also dipped to 68.5% from 75% last quarter.

Utilities. Segment revenue and profit dipped by -11.4%yoy and - 82.2%yoy respectively due to lower volume arising from the statutory turnaround at one of the Group’s Air Separation Unit in Kerteh, Terengganu coupled with higher repair and maintenance costs as well as; depreciation expenses incurred during the quarter.

Regasification. Due to the implementation of IBR, segment revenue was flat year-over-year whilst profit was down by - 12.6%yoy by higher depreciation upon recognition of jetty facilities at RGTP and higher plant maintenance expenses. Plant reliability in Sungai Udang and Pengerang was close to 100% during the quarter.

Third interim dividend of 18.0sen declared. PetGas also declared a third interim dividend of 18.0sen for the quarter under review which brings its year-to-date dividend declared to 50.0sen. This translates to an annualised yield of 4.0% yield to yesterday’s closing price and represents a 71% payout ratio out of its 9MFY19 70.0sen EPS.

Impact on earnings. Despite its 9MFY19 coming in above our expectations, we are making no changes to our FY19-20F earnings as we remain wary of the impact coming from the regulated business segments for now (i.e: gas transportation and regasification).

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on PetGas with an unchanged TP of RM16.26. 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 4.7% 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 - 20 Nov 2019