Gas Malaysia’s earnings to stay stable after rules change

KUALA LUMPUR: CIMB Equities Research expects Gas Malaysia’s earnings will likely remain stable post after the implementation of the third party access (TPA) and incentive-based regulation (IBR) regulatory period 2 in 2020.

It said on Wednesday the group aims to at least maintain its FY19 dividend per share at a level similar to FY18, which translates into a decent dividend yield of c.5%.

“Maintain Add with a revised TP of RM3.11, still based on 20.5 times FY20F price-to-earnings (P/E).

CIMB Research said Gas Malaysia’s earnings profile could change as it enters the IBR regulatory period  (RP2) in 2020. 

Following the implementation TPA and RP2, it believes (i) other parties will be allowed to access its pipelines to distribute gas, (ii) pipeline and retail distribution will likely be split into the distribution division (pipeline assets that are regulated) and the shipper division (retailing arm, which is not regulated), and (iii) returns for its regulated business (currently: 7.5%) will fall.

To recap, Gas Malaysia is the owner of its pipeline assets and the sole gas distributor to users that consume less than 5mmscfd of gas. 

Its regulated asset base (RAB) includes both the book value of its pipeline assets as well as an assumption of one month working capital required (for gas cost). 

“Management guided that the higher RAB of the distribution segment and higher margins from the shipper business should be able to offset the impact of potentially lower regulated returns,” it  said.

Gas Malaysia proposed a final FY18 DPS of 4.5 sen on 14 Mar 2019, bringing its total FY18 DPS to 13.5 sen (vs. FY17 DPS of 13 sen), which is slightly above its FY18 DPS forecast of 13 sen. 

This represents 96% of its FY18 reported earnings, translating into a decent dividend yield of c.5%. We gather that the group aims to at least sustain its FY1 DPS at a level similar to FY18, which is achievable, as it has been paying out c.100% of its earnings (dividend policy: 75% payout) over the past few years.

“We cut our FY19-21F by 0.2%-3% to factor in the higher operating costs. Our target price is revised to RM3.11, still based on 20.5 times FY20F P/E (one-year mean P/E). 

“We like Gas Malaysia for its stable earnings profile and attractive dividend yield of c.5% for FY19-21F. We see limited earnings impact on the group arising from potential reforms in the power sector. Maintain Add,” it said.
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