• Overview. Gas Malaysia’s (GMB) 3Q20 core net profit advanced 10.4% yoy on the back of lower revenue by 0.8% yoy caused by lower average natural gas tariff. Higher core net profit on yoy basis was attributed by higher EBITDA margin linked to higher margin spread and higher volume. On qoq basis, GMB revenue and core profit advanced by 11.9% qoq and 16.5% respectively due to the higher gas volume and margin spread.

• Key highlights. GMB’s monthly volume has recovered to pre-Covid 19 level, nevertheless cumulative 9 months volume is still lower than 9M19 due to the slowdown in gas offtake during 2Q20 caused by slower business activity during MCO.

• Against estimates: In Line. GMB’s 9MFY20 core net profit of RM145m came in line with both our and consensus’ forecast respectively at 76.7% and 78.4% respectively. The performance was largely attributed to higher gas volume owing to bigger customer base and wider margin spread. Sales volume of 53.2 MMBtu (+0.2 YoY) was driven by steel sector, pulp and paper while rubber gloves sector eased marginally from 39% to 37%.

• Outlook. We are positive on GMB’s earnings delivery due to the fixed tariff charged and this will ensure earnings stability. We are also positive on GMB’s expansion plan to acquire up to 60 new customers for 2020 and to ensure positive volume growth. We understand that GMB is quite certain that FY20 gas volume will not stray too far off from previous year’s due to commencement of big clients business since 3Q20. In view of MCO impact, GMB is also likely to rollover FY20 capex to FY21 and FY22.

• Our call. We maintain our BUY rating on GMB with TP of RM3.05 based on Sum of Parts (SOP) method (Table 1). We estimate that GMB would continue to deliver steady recurrent earnings and steady cash flow generation. While it is currently trading below its 5-year average PE of 22x, we believe this is fair given the undisclosed spread as opposed to the previous practice. Maintain BUY.

Source: BIMB Securities Research - 13 Nov 2020