Gas Malaysia (GMB) reported a decent set of 1Q19 numbers, which were within our and consensus expectations. Gas sales volume was up 2% yoy, but down 7% qoq at 47.9MMbtu due to seasonality. We see no excitement in earnings and company prospects at least until more clarity on the IBR framework is established, which we understand is still in the midst of being submitted to the Energy Commission. We make no changes to our earnings forecasts and maintain our HOLD rating with a slightly higher DDM-based TP of RM3.02 upon rolling forward our valuation horizon.

1Q19 Earnings Were Within Expectations

GMB’s 1Q19 earnings met our and market estimates, accounting for 20% and 21% of the respective full-year forecasts. 1Q is seasonally GMB’s weakest quarter. Core net profit was up 2.4% yoy supported by the upward revision in natural gas tariff and gas sales volume growth of 2%. The operating margin for 1Q19 was relatively flat yoy, as expected.

Sequential Earnings Weaker Due to Seasonality

Revenue was down 1.3% qoq to RM1.7bn. With a stable operating margin and higher associate contribution, offsetting the higher tax rate, core net profit was down a similar 1.2%.

Maintain HOLD

We fine-tune our earnings forecasts following the release of the updated 2018 audited numbers. We maintain our HOLD rating but raise our DDMbased 12-month target price of RM3.02 (from RM3.00) as we roll forward our valuation horizon but lower terminal growth to 3% (from 3.5%). GMB offers a decent 2019E dividend yield of 4.6% based on our dividend payout assumptions of 85% (GMB’s minimum dividend-payout policy at 75%).

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 - 16 May 2019