Gas Malaysia’s 9M core net profit below forecast

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: Gas Malaysia’s 9MFY18 core net profit came in below expectations, at 66% of CIMB Equities Research’s full year forecast and 70% of the Bloomberg consensus estimate. 

The research house on Thursday said the underperformance was due to lower-than-expected gas volume growth and higher-than-expected finance costs. 

Gas Malaysia’s 9M18 core net profit grew 30% on-year, supported by higher gross profit margin (+0.3 percentage point on-year), in line with the increase in volume of natural gas sold (+5.6% on-year).

Its 3Q18 revenue rose 12% on-year to RM1.6bil, mainly due to higher volume of gas sold (+3% on-year) and higher natural gas tariffs. 

Similarly, 3Q18 core net profit increased 22% on-year on higher revenue and better gross margin (+0.2 percentage point on-year). Quarter-on-quarter, 3Q18 core net profit fell 15% due to higher operating expenses. 

CIMB Research said Gas Malaysia expects gas volume growth in the near-term to be in the range of 4.5-5.5% (from 6% previously), in line with gross domestic product (GDP) growth and improved demand from existing and new industrial customers. 

“We believe the revised volume target is achievable as the group’s average gas volume growth was c.8% for the 2013-2017 period, and YTD gas volume growth was 5.6%.

“We cut our FY18-20F EPS by 3-7% to factor in the lower gas volume growth and higher finance costs. Our target price is revised down to RM3.18 after our earnings adjustment and as we roll over our valuation to FY20F. 

“We still like Gas Malaysia given the stable earnings profile and attractive dividend yield of c.5% for FY19-20F. We see limited earnings impact on the group arising from the potential power sector reform and third-party access (TPA). Maintain Add.

“Post TPA, 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), respectively. 

“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.

“Key downside risks to our Add call are lower-than-expected earnings after the TPA implementation and lower volumes of gas sold,” it said.