Gas Malaysia Bhd
(March 20, RM2.88)
Maintained add with a lower target price of RM3.11: Gas Malaysia Bhd’s earnings profile could change as it enters the incentive-based regulation regulatory period 2 (RP2) in 2020. Following the implementation of third party access (TPA) and RP2, we believe: (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 five million standard cubic feet per day (mmscfd) 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.

Gas Malaysia proposed a final financial year ended 2018 (FY18) dividend per share (DPS) of 4.5 sen on March 14, 2019, bringing its total FY18 DPS to 13.5 sen (versus FY17 DPS of 13 sen), which is slightly above our FY18 DPS forecast of 13 sen. This represents 96% of its FY18 reported earnings, translating into a decent dividend yield of around 5%. We gather that the group aims to at least sustain its FY19 DPS at a level similar to FY18, which is achievable, in our view, as it has been paying out around 100% of its earnings (dividend policy: 75% payout) over the past few years.

We cut our financial ending 2019 until 2021 forecasts (FY19-21F) by 0.2%-3% to factor in the higher operating costs. Our target price is revised to RM3.11, still based on  financial year ending 2020 forecasts (FY20F) price earnings of (P/E) 20.5 times (1-year mean P/E). We like Gas Malaysia for its stable earnings profile and attractive dividend yield of around 5% for FY19-21F. We see limited earnings impact on the group arising from potential reforms in the power sector. Maintain “add”.

Its attractive valuation and dividends are potential rerating catalysts. Key downside risks to our “add” call are lower-than-expected earnings after the TPA implementation and lower volumes of gas sold. — CGSCIMB, March 19