Gas Malaysia Bhd
(Feb 14, RM2.83)
Maintain buy with an unchanged target price (TP) of RM3.11: Gas Malaysia Bhd posted earnings of RM57.9 million for its fourth quarter of financial year 2019 (4QFY19). However, earnings, excluding exceptional items of RM28.2 million, came in at RM29.7 million. This brought FY19 cumulative earnings to RM172.4 million, which were within our and consensus full-year FY19 earnings expectations at 95% and 97% respectively. Quarterly revenue contracted by 3.5% year-on-year (y-o-y) due to an adjustment made based on gas cost pass-through mechanism during the current quarter to correct the accruals for under recovery of gas costs.

Earnings, after excluding the one-offs, dipped 31.3% y-o-y. On a quarterly sequential basis, revenue declined marginally by 4.4% while earnings contracted 29.2% quarter-on-quarter. This was mainly attributable to higher operating expenses and higher finance costs booked during the quarter.

We reiterate our view that FY20 gas sales volume will continue to sustain and register y-o-y growth. Our current gas volume growth projection remains between 4.5% and 5%, similar to that for FY19. Our assumption is premised on Malaysia’s resilient gross domestic growth (GDP) of 4.5% for 2020.

Our recent meeting with the management signalled that the company’s earnings growth going forward will be driven mainly by expansion of existing customers’ volume and better margins resulting from the recently-implemented third-party access regulation. The management also guided that FY20 forecast (FY20F) will see growth coming in, partially from higher volume of gas sold in line with its recently-acquired customers. We also note that gas sales volume growth will continue to be steered primarily by rubber, oleo-chemical, consumer products and glass manufacturing industries. Notably, the company is building more facilities between Kedah and Perlis, which would further increase its gas off-take.

We made no changes to our earnings estimate at this juncture as we expect Gas Malaysia to meet our FY20F earnings projection. We have also introduced our FY21F numbers in this report.

Our TP valuation is based on the Gordon growth model with risk-free rate assumption of 3.2%, market risk premium of 6.1%, beta of 0.6 times and a terminal growth rate of 4%. We remain positive on Gas Malaysia given that: i) we expect Malaysia’s GDP will continue to expand at 4.5% in 2020; ii) the company’s effort in acquiring new customers; and iii) growing pressure on manufacturers nationwide on the usage of clean energy such as natural gas in their operations, which we believe will push up the volume for Gas Malaysia. Key risks to our earnings outlook and dividend payout are the high capital expenditure requirement; higher future gearing and structural changes to the local gas pricing and consumption. — MIDF Research, Feb 14