Gas Malaysia’s (GMB) 2019 core net profit declined by a marginal 2% yoy and missed both our and consensus estimates. 4Q19 saw a one-off bump at the joint-venture profit level due to a tax-related reversal and LAD claim. Operationally, total natural gas volumes increased by 4% to 202MMbtu in 2019. GMB declared a 4.8sen dividend, bringing its ytd payout to 9.6sen (YTD18: 9sen). Maintain Hold with a lower target price of RM2.75.

2019 Core Profit Down by 2%

Adjusting for a series of one-offs (RM8m PPE write-off, RM1.8m trade receivable impairment write-back, RM22m deferred tax asset recognition and RM6m LAD claim at the joint-venture level), 4Q19 core net profit came in weaker at RM36m (-15% qoq, -14% yoy), bringing cumulative 2019 core net profit to RM168m (-2% yoy). Full-year results missed our estimate by 7% due to a lower-than-expected margin spread.

Headline Profit Rose on Stronger Joint-venture Profit

4Q19 revenue fell by 4% yoy to RM1,678.3m due to adjustments made for the under-recovery of gas costs, which was supported by a higher natural gas tariff and a 3% increase natural gas volume. Nevertheless, margins remained flat due to the gas cost pass-through mechanism. Headline profit was, nevertheless, 13% higher yoy driven by several one-off items recognised at the joint-venture level relating to deferred tax assets and the LAD claim. Excluding these from the headline JV figure, operating losses from the JV widened to RM5.3m due to larger hedging losses at its combined heat and power business (CHP). 4Q19 core net profit fell by 14% yoy largely due to this and the adjustment on gas cost recovery.

Maintain HOLD

We cut our 2020-21E earnings forecasts by 6% to factor in a lower margin spread. Maintain Hold with a lower DDM-based target price of RM2.75 (from RM2.85). GMB continues to be a good yield play offering a 4.6% yield but lacks a near-term catalyst. 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 - 14 Feb 2020