Gas Malaysia Berhad (GMB) reported a net profit of RM97.8mn, showing a slight improvement of 2.9% QoQ due to a lower adjustment of Internal Gas Consumption (IGC) costs. However, it declined by 8.9% YoY due to curtailed shipping volumes, higher operating expenses (OPEX), and a low contribution from joint ventures (JV). The results were in line with our and market's expectations, making up 51.6% and 53.5% of full-year estimates, respectively. A first interim dividend of c. 5.72sen has been declared. Moving forward, we anticipate earnings to normalize in the upcoming quarters, as we believe that the higher Malaysia Reference Price (with a 4-month lag) has peaked and the volume reduction from the rubber gloves sector has reached its lowest point. We maintain a HOLD call with a higher TP of RM3.40. Our valuation is derived from a DCF model with a WACC of 6.3% and a long-term growth rate of 2.0%.

• Within expectations. 2QFY23 net profit of RM97.8mn (QoQ: +2.9%, YoY: -8.9%) was in line with ours and consensus expectations, accounting for 51.6% and 53.5% of full year forecast respectively.

• Dividend. The Group declared a first interim dividend of 5.72sen per ordinary share.

• QoQ: In 1Q23, revenue dwindled by 17.2%, no thanks to lower average sales gas price and volume. However, earnings rose slightly by 2.9% due to lower adjustment on internal gas consumption (IGC) cost (2Q23:3%, 1Q23:6%) and other income.

• YoY. Top-line extended by 13.7% YoY driven by higher average natural gas selling price that aligns with global market price, though offset by lower volume of natural gas sold in 1Q23. Nonetheless, earnings dropped by 8.9% due to a 16% decline in GMES volume, increased operating expenses, and poor performance from the JV segment.

• Outlook. We anticipate that earnings will remain relatively stable for the remaining quarters of the year. We believe that the higher Malaysia Reference Price (with a 4-month lag) has already reached its peak and will subsequently normalize. Additionally, we expect the decline in volume from the rubber gloves sector to have reached its lowest point, which will be mitigated by an increase in volume from other industries following the reopening of the economy. Overall, we like GMB due to its prominent market share in the gas distribution segment, being the sole owner of the NGDS pipeline in Peninsular Malaysia and a reliable dividend player.

• Forecast. We have slightly upgraded our earnings forecast for FY23/FY24/FY25 by 1%/2%/30% respectively, as we revised our gas reserved capacity and some adjustments to depreciation and amortization.

• Our call. Maintain a HOLD call on Gas Malaysia with a higher DCF derived TP of RM3.40 (from RM3.31) based on WACC of 6.3% and terminal growth of 2.0%. Our TP implies 13.8x FY24F PE.

Source: BIMB Securities Research - 22 Aug 2023