KUALA LUMPUR (July 24): RHB Research is the latest house to initiate coverage on Gas Malaysia Bhd (KL:GASMSIA), pegging a nearly 30% upside to the current price.
The research house said the current elevated crude oil price environment calls for more bullish calls on Gas Malaysia, as it tends to benefit from higher oil prices — a key theme driving RHB's positive stance.
RHB initiates coverage on the stock with a 'buy' call and a sum-of-parts (SOP)-based RM6.50 target price (TP), implying a more than 25% upside to its current price of RM5.19, and a 5% financial year ending Dec 31, 2027 (FY2027) yield.
"We like Gas Malaysia as a beneficiary of higher gas prices and developer of a new regasification terminal 4 (RGT4) project. At the same time, regulated tariffs provide a stable, regulated earnings base and healthy dividend yield," said the house in a note.
Gas Malaysia is a beneficiary of higher crude oil prices, as its shipper division earns a fixed margin on Malaysia Reference Price (MRP) — gas prices that track Brent crude oil.
"Following the oil price spike in 2Q from the Middle East conflict, we forecast MRP to increase 26% year-on-year in 4Q given the nine-month lag to Brent oil price movement.
"We expect a stronger impact in 2027, and forecast MRP to increase 28% year-on-year, to reflect the 21% increase in Brent oil price increase in 2026.
Further, Gas Malaysia has received approval from the Energy Commission to build a new RGT4 in Yan, Kedah, with targeted commissioning by 2030.
The RGT4 project is crucial to ensure a stable gas supply to new gas plants coming online in 2030.
RHB believes RGT4 will be a key gas supplier to Malakoff Corp Bhd's (KL:MALAKOF) ('buy', TP: RM1.06) upcoming 2.8GW gas plants.
"Assuming RM2.1 billion capex, 6.9% WACC (weighted average cost of capital) and 70% stake, we have imputed a 49 sen/share valuation from the project into our SOP.
"We see potential upside from the allocation of gas capacity to Gas Malaysia’s shipper division, which could result in another 10% upside from our TP," it added.
Meanwhile, Regulatory Period 3 (RP3) tariffs provide stable earnings to Gas Malaysia, currently the sole operator of the natural gas distribution system network.
The house noted that Gas Malaysia had received a 20% tariff for RP3 (2026-2028).
RHB expects this to provide a stable earnings base for its regulated business, contributing to 40% of group profits, as Gas Malaysia earns a fixed regulated return on an expanding regulated asset base.
The firm estimates a 25% increase in regulated capex approval for RP3, which should see its regulated asset base grow to RM2.7 billion by end-2028.
RHB forecasts FY2026 earnings to grow 4% year-on-year to reflect higher regulated tariffs — mitigating lower volume and MRP.
The house expects FY2027 earnings to rise 16%, in line with higher MRP and volume rebound, before moderating 1% in FY2028 on lower MRP.
All in, RHB expects net margin to remain stable at 6% and is forecasting 6% earnings compound annual growth rate for FY2025-2028.
The firm derives its TP from ascribing 18 times price-to-earnings multiple on FY2027 recurring earnings, and incorporating a RM634 million discounted cash flow value for its upcoming RGT4.
Downside risks to its recommendation include lower-than-expected MRP, competition from other shippers impacting volume, and delays in RGT4 commissioning.