Gas Malaysia looks to reduce opex by 10%

Firm’s cost management helps cushion MCO impact

PETALING JAYA: Gas Malaysia Bhd which has been lowering its cost to cushion the impact of the movement control order (MCO) since March is hoping to reduce operating expenditure (opex) by about 10% in FY20.

Analysts note that the gas utility company’s proactive cost management had helped cushion the MCO impact, resulting in net profit for its first quarter ended March 31 (1QFY20) increasing 16% year-on-year (y-o-y) to Rm47.9mil. Its gross profit, meanwhile, rose by a quarter to Rm83.9mil in 1QFY20 from Rm67.3mil a year ago.

In 1QFY20, Gas Malaysia managed to reduce its opex by 14% y-o-y. For FY20, its management expects to reduce opex by 9-10%, MIDF Research said in a report following a post results briefing with the company.

“Furthermore, we understand that it is also currently re-evaluating its FY20 capital expenditure (capex) and this will likely result in lower capex spending for the year. That said, the capex for maintenance and repairs allocated for the year will remain,” it said.

Meanwhile, Kenanga Research said the impact from the MCO turned out to be less severe than expected.

This is because some of the company’s key off-takers like glove makers have been operating at full-steam during the MCO period and this should help to partially cushion any downtick in demand.

Going by this, the research firm said it has cut its FY20 estimated “demand growth assumption to -5% to 191.1mil British thermal units (mmbtu) from +3% at 207.2mil mmbtu, but keeps FY21 estimated volume assumption of 213.5mil mmbtu.”

“Thus, we cut FY20 estimated core net profit (CNP) by 12% while FY21 estimated CNP is reduced by 2% on cash flow related fine-tuning.”

Correspondingly, net dividend per share is lowered proportionally based on unchanged dividend payout of 90%. Kenanga Research said its sensitivity study shows that every 1% drop in demand growth would lead to 1.5% decline in earnings and vice versa.

Despite a potential setback in 2QFY20 due to the conditional MCO that’s now in place, it said Gas Malaysia’s long-term earnings prospects remain intact. The research firm reiterated its “market perform” call on the stock with a RM2.80 target price. MIDF Research meanwhile maintains a Buy rating with an unchanged target price of RM3.11.

“Sales volume has since been picking up beginning early-may with the gradual resumption of businesses since mid-april 2020. Hence, we opine that the low sales volume will be temporary in nature as we anticipate businesses to fully resume operations by end-may,” said MIDF Research.

The research firm said despite the current low gas price, the impact on Gas Malaysia is “cost neutral”.

This is due to the company’s fixed gas off-take agreement with its supplier, Petronas, that was inked in December last year and the take-or-pay contracts it had signed with its customers.

Gas Malaysia recently signed new contracts with its customers post implementation of the third-party access by the Energy Commission (EC) which started last year.

The newly-signed contracts, which will last until 2022, guarantees off-take of gas from its customers at the price stipulated in the contracts. The price will also reflect the current market price set by the EC.

“While customers are free to engage with other suppliers or shippers to benefit from the low natural gas price; Gas Malaysia is also insulated from customers rescinding their contracts due to the heavy penalty stipulated in the contracts. Hence, the take-or-pay condition it has with both Petronas and its customers will limit the downside risk arising from the low natural gas price.,” noted MIDF Research.