CIMB Research upgrades Gas Malaysia to Add, higher target price

To recap, the government had prescribed the incentive based regulation (IBR) framework which sets the base tariff for a regulatory period of three years from January 2017.

KUALA LUMPUR: CIMB Equities Research has upgraded Gas Malaysia to Add from Hold given the stronger-than-expected results, stable earnings profile and attractive dividend yield of about 6% at the current share price level. 

It said on Monday that Gas Malaysia’s year-to-date share price performance of -6.6% also lagged behind FBM KLCI’s +2.3% return. 

“It is currently trading at an undemanding valuation of 17 times FY19 price-to-earnings (P/E), which is at a c.20% discount to its mean P/E. Our target price is revised up to RM3.30 after our earnings upgrade, based on a one-year mean FY19 P/E of 20.5 times,” it said. The previous target price was RM2.70.

CIMB Research said Gas Malaysia’s FY17 core net profit came in above expectations at 124% of its and 119% of Bloomberg consensus full-year estimates. FY17 revenue rose 32% on-year, mainly driven by stronger-than-expected gas sales volume (+11.9% on-year,) and higher assets contributed by customers (+36.6% on-year). 

FY17 core net profit rose by 18% on-year, primarily driven by the increase in volume of gas sold and lower tax rate (-1% pts on-year,) which more than offset the higher operating expenses.

Its 4QFY17 revenue increased 40% on-year, mainly supported by the higher volume of gas sold (+5.2% on-year) and higher natural gas tariffs. Likewise, 4QFY17 core net profit rose 49% on-year due to higher gross profit which was in line with the higher volume of gas sold, and a lower tax rate (-5% pts on-year). 

“We believe the stronger gas volume was driven by the rubber, oleo-chemical, consumer products and glass sectors, coupled with new industrial customers. It declared a four sen DPS, in line with our expectation.

“Gas Malaysia’s earnings profile may change in 2019 once regulators review the current tariff under the third-party access (TPA). 

“Post TPA, the pipeline and retail distribution will likely split into the distribution division (pipeline assets which are regulated) and shipping division (retailing arm which is not regulated). However, as the shipping business will be a new source of earnings for the company, we think this could offset the decline in regulatory earnings,” it said.

CIMB Research said Gas Malaysia expects gas volume growth in the near-term to range between 6% and 6.5% per annum, in line with gross domestic product (GDP) growth and improved demand from the existing and new industrial customers. 

“We believe the volume target is achievable as the group’s average gas volume growth was c.8% for the 2013-2017
period. 

“We raise our FY18-19F EPS estimates by 12%-14% after reflecting the higher-than-expected gas volume (FY17 11.9% on-year growth vs. 6% on-year estimated growth in FY17),” said the research house.