GAS MALAYSIA BHD

By Kenanga Research Rating: Market Perform (maintained) Target price: RM3.00

KENANGA Research said that Gas Malaysia’s results for the first nine months of financial year 2019 (9M19) have slightly missed expectations.

At 72%/70% of house/street’s FY19 estimates, Gas Malaysia’s 9M19 core profit of Rm132.2mil fell short of estimates slightly owing to the losses incurred in both the second quarter of financial year 2019 (2Q19) and 3Q19 from 66%-owned JV company Gas Malaysia Energy Advance Sdn Bhd (GMEA).

“We have learnt that prior to the hedging adjustment, in fact, GMEA recorded Rm5mil profit.

“The loan hedging cost in 2Q19 and 3Q19 are one-offs and will not reoccur in the future.

“Operationally, core gas business reported yet another record sales volume of 51.4 million mmbtu which was 5% higher than 49.3 million mmbtu in 2Q19.

In addition, the improved revenue also partly due to higher actual average selling price by 5% to Rm34.66/mmbtu in second half of 2019 from Rm32.92/mmbtu in the first half of 2019,” stated the research house.

Post-9m19 results, Kenanga Research has trimmed FY19 forecast by 2% mainly on GMEA losses and higher interest assumption, but kept FY20 estimates unchanged.

Although there is uncertainty over the margin spread in the new Regulatory Period 2 from 2018 to 2020, Kenanga Research said it remains optimistic on Gas Malaysia’s steady volume growth while there is a new source of income arising from retail margin under the Third Party Access structure.

“We believe the market should have priced in the uncertainty as its share price has been hovering at the current level for the past one year despite improving results.

Thus, we maintain our “market perform” call with unchanged target price of RM3.00/ discounted cash flow share, which is supported by decent dividend yield of 4% to 5%.

“Upside risk to our call is sales volume continuing to be stronger than expected,” it noted.

Kenanga Research added that going forth, volume growth remains Gas Malaysia’s key earnings driver.

“While we believe impact from the cut in rate of return, if any, could be minimal given its relatively small regulated asset base of Rm1.9bil,” it said.