Gas Malaysia’s (GMB) 3Q18 core net profit declined 13% yoy mainly due to the impact of a higher effective tax rate compared to the prior year. We deem these results to be in line with our expectations as we anticipate stronger 4Q18 demand. Revenue continues to be on a growing trajectory underpinned by gas sales volume growth and tariff revisions. We reiterate our HOLD call and RM3.00 target price.

Impact of High Tax Rate – 9M18 PBT Achieved 72% of Our Estimate

3Q18 net profit came in slightly weaker at RM41m (-14.7% qoq, -13.3% yoy), bringing cumulative 9M18 net profit to RM129.3m (+6% yoy). We deem the results to be in line with both our and consensus estimates, which have achieved 69% and 70% of net profit forecasts respectively. The slight deviation was entirely due to the high effective tax rate recorded, as 9M18 PBT achieved 72% of our forecast. 9M18 revenue rose 16% yoy on the back of a 5.6% increase in gas sales volume and an upward revision in the tariff.

Volume and Tariff Increase Continue to Drive Revenue Growth

3Q18 revenue was up 11% yoy to RM1,556.3m driven by a higher gas sales volume (+3% yoy) and an upward revision in the natural gas tariff. Gross margin was slightly weaker yoy, down 0.7ppt due to higher repair and maintenance costs.

Maintain HOLD

We maintain our earnings forecast and DDM-based 12-month target price of RM3.00, which implies a 19x forward PE. GMB continues to offer among the best yields in our coverage at 4.4%, based on an 85% dividend payout ratio assumption. Maintain HOLD.

Risks to Call

Key upside risks include higher-than-expected sales volumes and a better margin spread. Downside risks include an economic recession affecting demand for natural gas.

Source: Affin Hwang Research - 15 Nov 2018