• 3Q18 core profit fell 15% qoq and 13% yoy to RM41m but 9M18 core earnings grew 6% to RM88m and trailed our estimates at 63% and consensus’ at 71%.

• The quarter’s poor performance was due to higher feedstock costs which saw lower gas spread, based on our estimates, and, to a lesser extent, shorter working period during the quarter.

• While we expect some earnings respite in 4Q18, we err on the side of caution and pare down our 2018F earnings by 8% and take a more conservative view in 2019F and 2020F.

• We remain positive on GMB’s prospect on the back of structural growth sales volume from new pipelines while IBR Framework ensures stable cashflow generation. BUY with lower RM3.50 TP.

Demand still robust

Revenue growth remain robust to grow at 3.5% qoq and 11% yoy. The growth was aided by higher gas tariffs while sales volume growth also remain robust. However, higher feedstock costs during the quarter saw gas spread moderating and contributed to the weak performance. Core earnings for 3Q18 fell 15% qoq and 13% yoy to RM41m. We also believe that the weaker earnings was on the back of the shorter working period during the quarter.

9M18 trailed expectations

Over the 9M18 period, revenue growth stood at 16% yoy to come in at RM4.5bn; it was particularly strong in 1H18 as revenue then was up c.19% aided by higher tariffs and volume. However, the weaker gas spread in 3Q18 led to 9M18 EBITDA margin easing to 5% (9M17: 5.1%; 6M18: 5.2%). Overall, core profit rose by 6% to RM129m and trailed ours and consensus estimates at 63% and 71% respectively.

Moderating expectations

Over the medium to longer term, we remain positive on the company’s prospect as ongoing capital contribution and new pipes addition offers potential structural growth going forward. However, the disappointing 3Q18 results has caused us to take a more conservative stance for its near term outlook; we cut 2018-20F estimates by 8-10% on changes to: i) lower gas spread of RM1.88/mmBTU (from RM1.93/mmBtu); ii) lower sales volume growth trajectory; and iii) higher interest expense.

Maintain BUY with lower RM3.50 TP

Despite lowering growth expectations, we remain positive on GMB’s prospect stemming from structural volume growth from new pipelines and stable cashflow generation from the IBR Framework and GCPT mechanism. Maintain BUY with a lower SOP-derived TP of RM3.50.

Source: BIMB Securities Research - 15 Nov 2018