• 2Q18 core profit rose 20% qoq and 22% yoy to RM48m while 1H18 core earnings grew 18% to RM88m due to increase in sales volume and tariffs which more than offset higher effective tax rate
• Overall, 1H18 core earnings trailed ours and consensus estimates at 43% and 48% respectively. We deem this to be inline ahead of steady demand growth in 2H18.
• A 4.5 sen DPS was declared, 12.5% higher than the 4 sen declared in 2Q17. We expect full year DPS of 13sen based on 84% payout.
• The new government’s continued adoption of the IBR Framework and GCPT mechanism is positive for the sector. Maintain BUY.

Sustained growth momentum

Revenue growth remain robust at 5% qoq and 17% yoy. The qoq growth was driven by higher volumes while yoy was also aided by higher gas tariffs. Still, EBITDA growth remained robust at 16% qoq and 27% yoy possibly on favourable implied gas spread achieved. The gains from turnaround in associate contribution were offset by higher interest cost while effective tax rate also came in higher. Overall, 2Q18 core earnings rose 20% qoq and 22% yoy to RM48m.

1H18 deemed inline; expect respite in 2H18

Over the 1H18 period, revenue grew 19% yoy to come in at RM2.9bn. This is despite capital contribution recognised under the new MFRS 15 accounting standards being lower (1H18: RM1.7m vs 1Q17: RM7.2m). While gas tariff contributes to the strong revenue growth, management also noted higher sales volume during the period. The expansion in EBITDA margin and robust EBITDA growth also points to higher gas spread achieved. Overall, core profit rose 18% to RM88m and trailed ours and consensus estimates at 43% and 48% respectively. Still, we deem this as inline as we expect steady growth momentum in 2H18.

Growth outlook remains intact

The strong revenue growth continued to reflect the robust state of the Manufacturing sector while ongoing capital contribution and new pipes addition offers potential structural growth going forward. The volume from these new greenfield pipes would typically see meaningful contribution after 1-2 years of installation as factory output ramps up. Management guided 6-6.5% sales volume growth for 2018 while it remains hopeful on prospects of its non-regulated businesses.

Maintain BUY with RM3.90 TP

We are positive with the new government retaining the IBR Framework and GCPT mechanism. This would guarantee stable cashflow for Gas Malaysia and the broader utility sector. Maintain BUY with an SOPderived TP of RM3.90.

Source: BIMB Securities Research - 9 Aug 2018