KEY INVESTMENT HIGHLIGHTS

• PGB’s 2QFY20 earnings grew +8.8%yoy to RM547.1m attributable to higher revenue from regasification segment

• Earnings was also boosted by better revenue contribution from gas processing following lower operating costs

• Lower offtake of electricity due to MCO impacted utilities performance during the quarter

• Second interim dividend of 16.0sen and special dividend of 50.0sen declared for 2QFY20

• Maintain NEUTRAL with an unchanged TP of RM16.00/share

Petronas Gas Berhad’s (PGB) 2QFY20 net profit came in at RM547.1m. This brings its 1HFY20 cumulative earnings to RM1,067.2m which was within both our and consensus’ full-year earnings estimates at 56.3% and 54.0% respectively. Comparing against 2QFY19, revenue grew marginally by +1.4%yoy to RM1,399.8m which was in-line with the upward revision in tariff from the implementation of Incentive Based Regulation (IBR). Meanwhile earnings increased by +8.8%yoy as a result of better revenue contribution from regasification segment during the quarter. This was however, negated by the lower contribution from the utilities segment arising from lower electricity sales volume. On a quarterly sequential basis, revenue was rather flat whilst earnings increased by +5.2% respectively.

Strong asset reliability at close to 100%. During the quarter, PGB registered higher earnings year-over-year during the quarter; largely attributable 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); (ii) lower operating and depreciation costs from Gas Processing segment and; (iii) higher revenue from gas transportation and regasification following better tariff under RP1.

Gas Processing. Segment revenue was flat year-over-year at RM429.7m during the quarter whilst the segment results increased by +14.6%yoy to RM249.5m due to lower depreciation expenses arising from fully depreciated assets and lower maintenance expenses.

Gas Transportation. Segment revenue was flat year-over-year during the quarter whilst profit declined marginally by -3.7%yoy. This was primarily due to lower net RP1 tariff after excluding IGC despite registering lower operational expenses. Gas transmission reliability was at near 100%.

Utilities. Segment revenue and profit were both lower by -6.9%yoy and -15.2%yoy respectively largely due to lower offtake of electricity during the quarter. Furthermore, lower depreciation expense and utilities cost of sales were offset by the lower sales volume for electricity.

Regasification. Segment revenue and profit grew by +13.6%yoy and +6.0%yoy to RM349.9m and RM167.8m respectively during the quarter arising from the higher tariff implemented under the Regulatory Period 1 at RM3.455/GJ for RGTSU and RM3.458/GJ for RGTP respectively which started in January 2020. These new tariffs were higher as opposed to the tariff approved by the Energy Commission (EC) during the pilot period last year where the tariffs were RM3.518/mmBtu for RGTSU and USD0.637/mmBtu respectively. Plant reliability in Sungai Udang and Pengerang were close to 100% during the quarter.

Second interim dividend of 16.0sen and special dividend of 50.0sen declared. PGB declared a second interim dividend of 16.0sen for the quarter under review. Additionally, it has also declared a special dividend of 50.0sen. This brings its 1HFY20 dividend declared (excluding the special dividend) to RM0.32 which is comparable to the same period last year and within our FY20F dividend estimate. This also translates to an annualised yield of 3.9% yield to yesterday’s closing price and represents a 69.2% payout ratio out of its 1HFY20 46.3sen basic EPS.

Impact on earnings. We made no changes to our FY20-21F earnings estimate at this juncture pending its analyst briefing due to be held today - 21st August 2020.

Target price maintained at RM16.00 per share. We are maintaining our target price on PetGas at RM16.00 for now, pending its analyst briefing today. Our target price is premised on a forward PER21 of 16.5x pegged to EPS21 of 97.0sen. The target PER is based on PetGas’ rolling four-quarter average PER over five years

Maintain NEUTRAL. We are maintaining our NEUTRAL recommendation on PetGas. Our NEUTRAL recommendation is due to the limited earnings upside in the coming quarters given the ongoing transfer of asset base from depreciated replacement cost (DRC) to net book value (NBV) under the IBR which will continue to put pressure on the profitability of its Gas Transportation segment. That said, going forward we are of the opinion that the company will continue to perform premised on: (i) strong and stable income stream; (ii) ancillary business coming on board in 2HFY20 which will support core earnings and; (iii) improved revenue recognition from gas transportation and regasification following the better tariff for RP1.

Source: MIDF Research - 21 Aug 2020