This article first appeared in The Edge Financial Daily on November 14, 2017

Petronas Gas Bhd
(Nov 13, RM17.44)
Maintain hold recommendation with a target price of RM18.50: Excluding an unrealised foreign exchange gain of RM5 million, third quarter of financial year 2017 (3QFY17) core profit came in at RM412 million (minus 1% quarter-on-quarter [q-o-q]; minus 3% year-on-year [y-o-y]).

This takes nine-month (9M) FY17 core profit to RM1.291 billion, forming 75% of our FY17 full-year projection. We note that Petronas Gas Bhd’s (PetGas) margins were affected by higher depreciation costs (+11% q-o-q; +10% y-o-y) during the quarter due to completion of several capital projects.

Nevertheless, 3QFY17 revenue was steady at RM1.16 billion (minus 1% q-o-q; flat y-o-y), underpinned by its long-term agreements with Petroliam Nasional Bhd (Petronas) for its gas processing, gas transportation and regasification businesses, which collectively contributed 76% of 3QFY17 revenue.

Despite the resilient nature of its business, PetGas experienced higher operating costs in 3QFY17 due to higher repair and maintenance expenses, as well as higher depreciation costs. Therefore, 3QFY17 gross margin came in at 44%, compared with 47% in 1QFY17 and 45% in 2QFY17.

PetGas declared a third interim dividend per share (DPS) of 16 sen in 3QFY17, which is in line with its quarterly payment practice. This brings 9MFY17 dividends to 47 sen, which implies a 71% payout.

Its balance sheet remains healthy with a cash pile of RM2.43 billion, representing RM1.23 sen cash per share. — AllianceDBS Research, Nov 13