KEY INVESTMENT HIGHLIGHTS

• PGB’s 3QFY20 earnings grew +36.9%yoy to RM591.0m attributable to higher revenue from regasification segment
• Earnings was also boosted by better revenue contribution from gas processing following lower depreciation and operating costs
• Higher steam and industrial gases sales volume recorded by the utilities segment also helped to boost earnings
• Third interim dividend of 18.0sen declared
• FY20-21F lifted by +14.8% and +15.4% respectively
• Upgrade to BUY with a revised TP of RM17.90 per share

PGB’s 3QFY20 earnings of RM591.0m beat estimates. Petronas Gas Berhad’s (PGB) 3QFY20 net profit came in at RM591.0m. This brought its 9MFY20 cumulative earnings to RM1,658.2m which was above both our previous and consensus’ full-year earnings estimates at 87.5% and 88.2% respectively. Comparing against 3QFY19, revenue grew by +5.2%yoy to RM1,407.4m which was in-line with the higher tariff in RP1 as well as; higher steam and industrial gases sales volumes. Meanwhile earnings jumped by +36.9%yoy as a result of better revenue contribution from gas processing and regasification segment during the quarter. On a quarterly sequential basis, revenue was rather flat whilst earnings increased by +8.0% 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 RM427.0m during the quarter whilst the segment results increased by +26.0%yoy to RM247.8m 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 grew by +12.1%yoy. This was primarily due to lower internal gas consumption and other operational expenses. Gas transmission reliability was at near 100%.

Utilities. Segment revenue and profit were both higher by +8.9%yoy and >100.0%yoy respectively largely due to higher steam and industrial gas sales volume recorded during the quarter. Furthermore, lower depreciation expense and utilities cost of sales help to boost profit during the quarter.

Regasification. Segment revenue and profit grew by +11.7%yoy and +39.8%yoy to RM350.6m and RM216.0m 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.

Third interim dividend of 18.0sen declared. PGB declared a third interim dividend of 18.0sen for the quarter under review. This brings its 9MFY20 dividend declared (excluding the special dividend of 50sen declared in 2QFY20) to RM0.50 which is comparable to the same period last year and within our full-year FY20F dividend estimate of 64.0sen. This also translates to an annualised yield of 4.1% yield to yesterday’s closing price and represents a 65.8% payout ratio out of its 9MFY20 76.0sen basic EPS.

FY20-21F earnings lifted on better-than-expected 3QFY20. Following the better-than-anticipated cumulative earnings, we are revising our FY20-21F earnings upwards by +14.8% and +15.4% to RM2,175.9m and RM2,214.2m respectively as we input better margins for its business segments from lower-than-expected depreciation and maintenance expenses.

Target price revised to RM17.90 per share. In-line with our earnings revision, we are revising our target price on PetGas to RM17.90 (from RM16.00 previously). Our target price is premised on a forward PER21 of 16.0x pegged to higher EPS21 of 111.9sen. The target PER is based on PetGas’ rolling four-quarter average PER over five years

Upgrade to BUY. We are upgrading our recommendation on PetGas to BUY (from Neutral previously) following the better-than-expected earnings recorded for two (2) consecutive quarters. While we were initially wary of 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 however, we have turned more positive on the company given that it has managed to offset the decline coming from the regulated business segments via lowering costs and increasing ancillary income. Going forward we are of the opinion that the company will continue to perform premised on: (i) strong and stable income stream; (ii) growing contribution from its ancillary business which will support core earnings and; (iii) improved revenue recognition from gas transportation and regasification following the better tariff for RP1. Furthermore, its fundamental remains intact and its FY21F dividend yield remains decent at 4.0%.

Source: MIDF Research - 20 Nov 2020