3Q19: Haunted Again by Hedging Losses

Gas Malaysia’s (GMB) 3Q19 net profit missed expectation due to hedging losses for its combined heat and power (CHP) business which recorded a wider loss. Elsewhere, 9M19 gas sales volume grew 4% yoy. We cut our FY19-21 EPS forecasts to factor in weaker JV profit. Maintain HOLD and lower our target price to RM2.85. No dividend was declared (YTD: 4.8sen vs 4.5sen in 9M18).

Revenue to Operating Profit Was in Line With Forecasts…

GMB’s recorded a 3Q19 net profit of RM42m (+2% yoy, -14% qoq). 9M19 profit grew 2% yoy to RM132m, representing 70% of both our and street’s estimate, which missed expectations. The deviation was due to larger JV losses of RM3m as compared to 2Q19. No surprises at the gross profit margin and effective tax rate levels. 3Q19 gas sales volume increased by 7% yoy largely continue to be driven by rubber and oleo-chemical business.

…but Profit Miss as JV Losses Widen

3Q19 earnings missed due to wider JV losses which amounted to RM2.7m, as compared to RM0.6m loss in 2Q19. This was as a result of foreign currency hedging losses for its CHP business.

Revised Our Earnings on Weaker JV Projection

We lower our FY19-20E EPS forecasts by 4% as we now assume CHP business to record RM4m/RM2m losses as compared to RM4m/RM6m profit previously. We understand that the business will continue to see earnings volatility due to the hedging element and may be affected by unforeseen unscheduled disruption operationally.

Maintain HOLD

We trim our DDM-based target price to RM2.85 (from RM2.91) post earnings revision. We do not expect any dividend risks where we conservatively forecast a 85% dividend payout ratio, lower than its past 2-years average historical payout of 90%, which implies a dividend yield of 4.3%. 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 2019