4Q17 Results Positively Surprised

GMB’s headline profit surged 57% yoy to RM77m in 4Q17 due to an increase in gas sales volume and an upward revision in gas tariff. For the full year, the higher core net profit (+18% yoy) was attributable to: (i) increase in gas sales volume on the back of robust manufacturing activities, (ii) upward revision in gas tariff, and (iii) stable gas margin spread. We upgrade GMB to BUY with a higher target price of RM2.97.

4Q17 Results Above Expectation

GMB’s reported a strong set of 4Q17 numbers as core profit of RM77m (+57% yoy) came in ahead of both our and consensus estimates, and represented 124% and 117% of forecasts respectively. The positive earnings surprise against our forecast was due to better-than-expected gas sales volume and profit recognized from the Combined Heat and Power (CHP) business. GMB declared another 4sen interim DPS, bringing ytd DPS to 8sen.

Higher Volumes and Tariff Hikes Drove Profitability

4Q revenue surged 40% yoy to RM1.4bn on higher natural gas sales volume and tariff. Gross profit margin came in at 7.7% in 4Q17 (+0.3ppts yoy; +2.5ppts qoq). Contribution from joint venture also recorded a positive surprise as it posted the highest ever profit at RM2.9m due to a change in accounting treatment on its CHP business. Effective tax rate was also lower 4.3ppts yoy. All in, this led to the 57% yoy increase in 4Q core net profit.

Upgrade to BUY With Higher RM2.97 Target Price

We introduce our FY20E net profit forecast of RM207m and raise our EPS forecast for 2018-19E by 8% and 9% to incorporate the better performance from its CHP business and better gas margin spread. Meanwhile, we expect the volume growth to normalize off the high base recorded in 2017. We also raise our DDM-based target price to RM2.97 (from RM2.89). With a 10% upside potential, we upgrade the stock to BUY.

Risks

Key downside risks include: 1) an economic recession affecting demand for natural gas; and 2) start-up losses from the group’s joint ventures.

Source: Affin Hwang Research - 19 Feb 2018