Gas Malaysia’s (GMB) 3Q17 results were in line with our expectation with core net profit at RM47.3m (+10% yoy). The 9M revenue rose 29% yoy, primarily driven by an increase in both gas sales volume and an upward revision in the natural gas tariff. We lower our previous 100% dividend payout assumption to ~65% in FY17E and ~90% over FY18- 19E. This is to factor in a more aggressive capex plan ahead, in line with management guidance of RM700m over the next 3 years (2016: RM133m). We lower our DDM-based 12-month TP to RM2.89 and maintain our HOLD call.

3Q17 Results Within Expectations

GMB’s 3Q17 core net profit of RM47.3m (+13% qoq; +10% yoy) was in line with our expectations. The 9M17 core net profit represented 74% and 75% of our and consensus full-year estimates. The higher gas sales volume, which grew by 11%, coupled with an upward revision in the natural gas tariff drove 9M revenue higher by 29% to RM3,878m. However, the lower gross profit margin, which fell by 1ppt to 5% coupled with higher administrative expenses resulted in only marginal 2% increase in core net profit. GMB recorded a gas sales volume of 134.8mmbtu for 9M17 vs. 121.2mmbtu in 9M16, driven by the rubber, oleo-chemical, consumer products and glass businesses.

Sequential Improvement

3Q core net profit grew 13% qoq to RM47.3m in tandem with revenue, which rose by 9% on the back of a 3% increase in gas sales volume and upward revision in the natural gas tariff. The gross profit margin was flat at 5.2%.

Maintain HOLD; Lower TP to RM2.89

We adjust our FY17-19E earnings forecasts slightly which mainly reflect the changes in our dividend payout assumptions as highlighted above. We maintain our HOLD call with a lower DDM-based target price of RM2.89 (from RM3.22).

Risks to Our Call

Key upside risks include higher-than-expected sales volume and better margins. Key downside risks would be an economic recession affecting demand for natural gas and start-up losses from the group’s joint ventures.

Source: Affin Hwang Research - 10 Nov 2017