Gas Malaysia’s (GMB) 2Q19 result missed our estimate by 5% due to a higher than expected effective tax rate. Operationally, 6M19 sales volume grew by 20% yoy, with revenue within expectations. GMB declared a first interim dividend of 4.8sen (higher than 4.5sen in 2Q19). We trimmed our EPS forecasts by 4–5% and lower our target price to RM2.91 (from RM3.02 previously). Maintain HOLD.

Below Our Expectations

GMB’s 2Q19 net profit grew 2% yoy to RM49m, bringing 6M19 profit to RM90m (+2% yoy). However, the result missed our expectation, but was in line with consensus’ estimates, representing 45%/48% of forecasts respectively. The deviation was largely due to a higher than expected effective tax rate of 25% for 6M19 vs our forecast of 22%, and a surprise loss amounted to RM0.6m at the joint venture level in 2Q19 (vs. RM1.7m profit in 2Q18/1Q19).

Sequential Improvement Despite JV Losses

Gas sales volume was up 3% qoq driving 2Q19 revenue higher by 1.2%. Net profit increased by 19% qoq, despite the JV recording a loss of RM0.6m (vs. RM1.8m), which we understand was a result of hedging loss for foreign currency loan.

Maintain HOLD But Lower Target Price to RM2.91

We revised our FY19-21E EPS forecasts by 4–5% as we revised upwards our previous effective tax rate assumption (from 22% to 24%), and lowering our JV profit. We do not foresee any near term catalyst on the stock pending more clarity on the revised incentive based regime (IBR) framework, which could possibly pose downside risks to its current distribution earnings. Reaffirm HOLD rating and lower our DDM-based target price to RM2.91. We kept our dividend pay-out ratio assumption unchanged at 85%.

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 - 20 Aug 2019