Gas Malaysia Bhd
(Aug 12, RM2.54)
Maintain hold with a higher target price of RM2.30 from RM2.20 previously. We reiterate our “hold” rating, despite raising our financial year 2016 (FY16) to FY18 earnings by 9%.

We believe growth outlook remains subdued in the near term, in tandem with the moderation in the industrial sector.

This is largely due to the fact that its target market, industrial players, consume at least 95% of its gas volume.

Gas Malaysia Bhd’s second quarter financial year 2016 (2QFY16) earnings came in at RM38.8 million, taking first half financial year 2016 (1HFY16) earnings to 54% of our earlier full-year forecast.

Despite the increase in natural gas tariff effective January 2016, 2QFY16 gross margin remained steady at 6.2%, compared with 6.3% in 2QFY15 due to the full implementation of the cost pass-through mechanism.

Effective January, the gas tariff mechanism is based on incentive-based regulation, which has improved its earnings clarity, though its profitability is likely to still trend lower.

However, Gas Malaysia will no longer bear the burden of volatile fuel cost as the tariff will be revised every six months, and volume growth will be its key earnings driver going forward.

We expect volume growth to remain subdued in view of the relatively weaker economic outlook, which may reduce the gas consumption of industrial players.

We understand that gas supply from Petroliam Nasional Bhd (Petronas) is not a constraint given the low utilisation at the Melaka regasification terminal.

The key risk to our view is the gas tariff revision which is subject to government approval, and hence, there is no assurance the biannual revision will be implemented. — AllianceDBS Research, Aug 12