Despite capital contribution recognised under the new MFRS 15 accounting standards being lower (1Q18: RM0.9m vs 1Q17: RM1.3m), revenue grew 21% yoy. This was on the back of higher gas volume sold and tariff which more than offset the increase in opex and effective tax rate. As a result, 1Q18 core earnings grew 23% yoy and made up 20% and 21% of ours and consensus expectations. We deem this to be inline as we expect some earnings respite particularly in 2H18.
On qoq basis, core earnings declined 47% despite higher gas tariff. The weakness was attributed to several factors: 1) capital contribution was higher in 4Q17 as per pre-MFRS 15 accounting standard, and 2) lower gas volume sold in 1Q18. We also note that effective tax rate was higher in 1Q18 at 27% (4Q17: 20.9%), contributing to the decline.
The strong revenue growth continue to reflect the robust state of the Manufacturing sector while ongoing capital contribution and new pipes addition offers potential structural growth for Gas Malaysia going forward. Typically, gas volume from new greenfield pipes would see meaningful contribution after 1-2 years of installation as factory output is ramped up. Management guided sales of gas volume to grow by 6-6.5% in 2018 while it remains hopeful on prospects of its non regulated businesses.
We believe recent share price weakness was largely due to concerns over sanctity of the IBR Framework and GCPT mechanism following the new federal administration. We take the view that the framework would continue to be observed by the new administration given the potential increase in subsidy bill for fuel pump price and reduced revenue collection from the GST holiday. Maintain BUY with an SOP derived TP of RM3.90.
Source: BIMB Securities Research - 30 May 2018
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