Gas Malaysia FY18 core earnings below forecast, says CIMB Research

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 FY18 core net profit came in below expectations, at 93% of CIMB Equities Research and Bloomberg consensus estimates due to lower-than-expected gross margin. 

The research house said on Friday FY18 core net profit (excluding disposal gain and write-back of impairment) improved 3% on-year, underpinned by steady growth in gas volume (+5.4% on-year) and lower operating expenses (-15% on-year). 

“We believe the stronger gas volume was driven by higher sales to the rubber, oleo-chemical, and glass sectors, and new customers,” it said. However, it lowered its target price from RM3.18 to RM3.12.

As for 4Q18 revenue, it rose 19% on-year, mainly supported by the higher volume of gas sold (+4.8% on-year) and higher natural gas tariffs. 

Nonetheless, 4Q18 core net profit declined 34% on-year due to lower gross profit (-2.5% pts on-year), in line with lower gas contribution margin during the quarter, as a result of a one-off catch up gas cost pass through (GCPT) adjustment made in the quarter last year.

“Gas Malaysia expects gas volume growth in FY19 to be in the range of 4.5%-5.5% on-year, in line with Malaysia's gross domestic product (GDP) growth and improved demand from existing and new industrial customers. 

“We believe its volume target is achievable as the group’s average gas volume growth was c.7.3% on-year over the 2013- 2018 period, and FY18 gas volume growth came in decent at 5.4% on-year,” it said.

A second interim DPS of 4.5 sen was declared for 4Q18, bringing the DPS declared so far for FY18 to 9 sen (FY17 first and second interim DPS: 8 sen). 

“Our FY18 DPS forecast of 13 sen is on the conservative side, as the FY17 final interim DPS was 5 sen. Assuming
Gas Malaysia declares a similar 5 sen final DPS for FY18, this could lift its total FY18 DPS to 14 sen (note: Gas Malaysia typically announces its dividends in three tranches).

“We cut our FY19-20F EPS by 2-6% to factor in the lower gross margin due to higher operating costs. Our target price is revised to RM3.12, still based on 20.5x CY20F P/E (1-year mean P/E). 

“We like Gas Malaysia for its stable earnings profile and attractive dividend yield of c.5% for FY19-20F. We see limited earnings impact on the group arising from potential reform in the power sector. Maintain Add. Its attractive valuation and dividends are potential re-rating catalysts,” it said.