This article first appeared in The Edge Financial Daily on August 14, 2017 - August 20, 2017

Gas Malaysia Bhd
(Aug 11, RM2.96)
Maintain hold recommendation with an unchanged target price (TP) of RM2.90: We believe earnings growth outlook will remain subdued in the near term given the moderation in gas consumption growth from industrial players. This segment’s demand is the key earnings driver for Gas Malaysia (GMB) under the gas cost pass-through mechanism that has been in place since January 2016. Maintain “hold” given the lack of catalysts.

The government has prescribed the Incentive-Based Regulation (IBR) framework for the natural gas tariff for the non-power sector in Peninsular Malaysia from January 2017 to December 2019 based on a step-up basis every six months to impute higher gas cost due to gas subsidy rationalisation. This may also result in more tepid demand growth.

Our earnings estimates are slightly higher than that of consensus, which could be due to our higher revenue assumption which imputed 4% growth in sales gas volume.

Higher-than-expected gas consumption from industrial sector is a critical factor for GMB as more than 95% of its sales come from industrial players. A strong economic outlook will also contribute to better gas volume growth.

GMB’s second quarter financial year 2017 (2QFY17) earnings grew 17% quarter-on-quarter (q-o-q) and 2% year-on-year (y-o-y) to RM39.5 million, taking first half (1HFY17) earnings to RM73.2 million, which made up 43% of our FY17 projection. We expect 2HFY17 earnings to improve further as gas consumption is typically higher in 2H.

2QFY17 revenue came in at RM1.287 billion (+8% q-o-q, +32% y-o-y) due to higher volume of gas sold and tolling fees. We noted that its gas procurement cost increased 8% q-o-q in 2QFY17, though local piped gas cost remains unchanged, which could be attributable to higher gas consumption. Meanwhile, 2QFY17 gross margin improved to 5.1% compared with 4.7% in 1QFY17.

GMB declared a first interim dividend per share of four sen for 1HFY17, similar to its payout in 1H16. It typically rewards shareholders with higher dividends in 2H.  

Our dicounted cash flow-based TP is maintained at RM2.90 The stock is currently trading at 22 times FY17F price-earnings ratio, which is not attractive, in our view, for a regulated utilities player. — AllianceDBS Research, Aug 11