We deem the soft 1QFY22 core profit of RM418.3m as broadly inline as we expect earnings, especially from Utilities segment to normalise in the coming quarters once the planned maintenance activities at customer’s facilities are completed. While we remain positive on PETGAS’ earnings prospects which is safeguarded by the IBR framework, all positives are reflected in the share price, in our view. Thus, we maintain our rating at MP but with a higher TP of RM17.51.

1QFY22 results in line. At 21%/22% of house/street’s FY22 estimates, 1QFY22 core profit of RM418.3m came broadly inline as we expect the Utilities earnings to normalise in the coming quarters as the weak 1QFY22 segment results were affected by planned maintenance at customers’ facilities which impacted sales. It declared 1st interim NDPS of 16.0 sen (ex-date: 03 Jun and payment date: 16 Jun) which is the same payout in 1QFY21.

Weak Utilities earnings affected sequential results. While revenue dipped 3%, 1QFY22 core profit fell 5% QoQ to RM418.3m from RM442.3m attributable to: (i) 61% decline in Utilities earnings owing to lower industrial gases and steam sales on planned maintenance at customers’ facilities as mentioned above, and (ii) lower earnings contributions from Gas Transportation (GT) and RGT on lower revenue owing to shortened calendar days in Feb. On the other hand, a lower JV income by 33% and higher effective tax rate due to the Prosperity Tax also dragged 1QFY22 earnings lower.

Higher IGC costs capped YoY earnings growth. While lower Utilities earnings which was affected by lower sales volume and a higher taxation impacted earnings, higher operating costs primarily internal gas consumption (IGC) costs for Gas Processing (GP), GT and RGT also contributed to 1QFY22 core profit being lowered by 25% to RM418.3m from RM554.3m in 1QFY21. In addition, RGT also faced higher maintenance costs for planned activities. Meanwhile, the share of JV incomes also declined by 29% to RM32.0m from RM45.0m previously.

Earnings especially Utilities to normalise in the coming quarters,  as business volume rebounds post completion of planned maintenance at customers’ facilities. Overall, while FY22 earnings are expected to be negatively impacted by one-off prosperity tax, the IBR framework provides safeguard to its earnings for the final year under RP1. We believe PETGAS will continue to see earnings certainty in RP2 which starts from Jan 2023. The new RM541m gas pipeline project to cater for an IPP in Pulau Indah and the RM460m gas compressor station project in Kluang should be the new earnings growth avenue in RP2 when the projects are ready in 1QFY23 and 1QFY24, respectively.

Maintain MP for its decent yield. Post results, we maintain our forecasts while our FY23 forecast has yet to factor in the new gas pipeline project. Going forth, we still like its resilient earnings profile which is well reflected in the share price. Thus, MP rating is maintained with revised TP of RM17.51 from RM17.44 after adjusting our new TP for GASMSIA (OP; TP: RM3.10). Our rating is supported by a sustainable c.5% dividend yield. Risk to our call is higher-than- expected business volume for non-regulated business.

Source: Kenanga Research - 20 May 2022