Gas Malaysia’s (GMB) FY18 core net profit was down 14% yoy, which fell short of our and consensus expectation. The deviation was mainly due to a higher than expected effective tax rate. Total volume of natural gas sold increased by 5.5% to 193.8MMbtu. GMB also declared a 4.5sen dividend. We reiterate our HOLD call and RM3.00 target price.

FY18’s PBT Achieved 105% of Our Forecasts; Deviation From Tax

GMB reported a 4Q18 headline profit of RM51.1m. After stripping off the RM9.4m impairment write back on trade receivables, core net profit was lower at RM41.7m bringing full year FY18 profit to RM171m (-14% yoy), which accounted for 91% and 93% of our and consensus earnings. Deviation against our forecasts was due to a higher than expected effective tax rate.

Volume and Tariff Increase Continue to Drive Revenue Growth

4Q18 revenue increased 18% yoy to RM1,738.5m driven by a higher natural gas sales volume which grew by 4.8% coupled with an upward revision in the natural gas tariff. Gross profit margin weakened from 7.7% to 4.2% attributed to a one-off catch up gas cost pass through (GCPT) adjustment made in 4Q17.

Maintain HOLD

We leave our earnings forecast unchanged and DDM-based 12-month target price at RM3.00, which implies a 18x forward PE. GMB continues to offer among the best yields in our coverage at 5%, based on an 85% dividend payout ratio assumption. Maintain HOLD rating.

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 or lower-than-expected earnings following TPA implementation.

Source: Affin Hwang Research - 15 Feb 2019