Gas Malaysia’s (GMB) 1Q20 results were in line with our forecast. Gas sales volume was up 4% yoy at 49.8MMbtu but revenue was lower by 6% due to lower tariffs. Our current forecast is 15% below consensus as we have factored in a much weaker gas sales volume, largely due to the weak economic outlook and also the Movement Control Order (MCO) impact. No changes to our assumptions. Maintain our HOLD rating with a slightly higher DDM-based TP of RM2.62 upon rolling forward our valuation horizon.

Within Expectations

GMB’s 1Q20 net profit met 29% of our full-year forecast. Revenue declined 6% on the back of revised lower average tariffs, but more importantly, gas sales volume grew 4% yoy. 1Q20 gross profit margin grew 1.1ppts yoy to 5.2% which we believe was due to the lower maintenance overhead costs and should likely normalize in the coming quarters. No details were shared pertaining to the higher tax rate at 29% (1Q19: 25%), pending clarity in the result conference call later.

Seasonal Weaker Volume

Sequentially, gas sales volume fell by 6% due to seasonality, leading to a 4% decline in revenue. We believe 2Q20 would likely see a wider decline in gas sales volume as businesses are impacted by the extended MCO. The narrowing in non-regulated business loss at the associate level also helped drive PATAMI growth by 34% qoq, due to the presence of the prioryear audit adjustment.

Maintain HOLD

We fine-tune our earnings forecasts following the release of the updated 2019 audited numbers. We maintain our HOLD rating but raise our DDMbased 12-month target price to RM2.62 (from RM2.55) as we roll forward our valuation horizon. We continue to view GMB as a defensive yield play with a 4% projected yield based on our 90% payout assumption (lower than >100% payout over the past 2 years).

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 - 22 May 2020