• 3Q20 results were above our expectations but in line with consensus. 9M20 gas sales volume declined by 1.8% yoy.
• Revenue is largely in line with our assumption making up 74% of our full-year estimates, with deviation arising from our more conservative margin assumptions.
• Raise our earnings by 10-14% and DDM-based 12-month target price to RM3.05 (from RM2.73). With >5% EBITDA margins looking sustainable, coupled with an average 5.4% dividend yield, this stock warrants an upgrade to BUY.

Gas sales volume declined 1.8% yoy

Gas Malaysia (GMB) registered 3Q20 revenue of RM1.7bn, bringing 9M20 to RM4.9bn (-6.5% yoy) attributable to both lower gas sales volume and tariffs. Cumulative gas sales volume declined 1.8% yoy, but we gather that 3Q20 monthly volume has recovered to pre-COVID levels. The rubber glove sector continued to contribute the bulk of volume at 37%, with consumer products at 17%, oleo-chemical 13% and glass sector at 8%. Overall, results beat our expectations, despite revenue falling in line with our expectation and hence largely driven by better-than-expected margins.

3Q volume recovered to pre-COVID level, guided to be flat qoq in 4Q

Sequentially, gas sales volume rose 11.8% in 3Q20 as demand recovered to pre-COVID levels, resulting in a 12% increase in revenue. 3Q20 saw glove, consumer products and oleo-chemical volume contribution (by percentage) decline, but supported by stronger commodity (steel, aluminium, copper) and ceramics sectors.

Good yield with decent growth; Upgrade BUY

We raise our 2020-22E EPS by 10-14% largely to factor in higher margin assumptions and recognition of revenue accrual in 4Q20. We raise our DDM-based target price to RM3.05 (from RM2.73). With estimated 4-7% EPS growth across 2021-22, GMB makes a good yield play (average 5.4% yield, assuming 90% payout ratio). Upgrade to Buy.

Key risks

Key downside risks include another full-on MCO lockdown which will have an adverse impact on natural gas volume, or lower-than-expected margins.

Source: Affin Hwang Research - 13 Nov 2020