Gas Malaysia Bhd
(Feb 13, RM2.80)
Maintain hold call with a lower target price (TP) of RM3. We cut our discounted cash flow (DCF)-based TP to RM3 after imputing the earnings revision. The key concern for Gas Malaysia is the lack of clarity on the pricing mechanism to pass on higher gas cost which is subject to government approval. Its net cash position of RM361 million will come in handy to weather any adverse situation. We reiterate our “hold” rating given the lack of rerating catalyst.

We believe that Gas Malaysia is unlikely to obtain approval to increase its tariff this year in view of the government’s concern about inflationary pressure on the economy which is expected to increase further after the implementation of the goods and services tax in April 2015.  Therefore, we have trimmed our forecast financial year 2015 (FY15F) earnings by 14% and FY16F by 13% to reflect the higher gas cost.

Gas Malaysia’s gas cost is expected to increase in FY15 in anticipation of higher volume of liquefied natural gas (LNG) purchased at market prices (less than RM40 per mmBtu currently, compared to the domestic piped gas price of RM15.55 per mmBtu). Its weaker-than-expected performance also represents its lowest quarterly profit since its initial public offering in June 2012, which was largely attributable to the higher LNG gas price. We have highlighted the concern Gas Malaysia would be unable to pass on the higher gas cost to consumers, which resulted in 4.4% gross margin in the fourth quarter of FY14, compared to its typical range of 10% to 12%. Gas Malaysia declared a second interim dividend per share (DPS) of four sen, taking FY14 DPS to nine sen.  — AllianceDBS Research, Feb 13

This article first appeared in The Edge Financial Daily, on February 16, 2015.