We are initiating coverage on GMB on an OUTPERFORM rating with a TP of RM2.94/DCF share. There are three simple reasons why we like GMB - the company is undeniably a growing cash cow with good yields. The expected fall in its earnings in FY12 is expected to be temporary as the 110MMScfd additional gas supply deal with Petronas should fuel its FY13-FY15 earnings growth. In addition, the back-to-back 'take-or-pay' agreements with Petronas and offtakers have capped the risk of its gas off-take not finding buyers. Post-2015, the proposed Pengerang RGT should be a new growth catalyst for the company.  

A gas company.  Gas Malaysia Bhd (GMB) is the only company licensed under the GSA by the Energy Commission to supply and sell reticulated natural gas in Peninsular Malaysia up until 1 September 2028. Currently, GMB has approximately 1,800km of pipelines in operation across Peninsular Malaysia serving 701 industrial customers, 546 commercial customers and 10,735 residential customers for natural gas. In the supply of LPG meanwhile, GMB serves one industrial customer, 1,117 commercial customers and 22,630 residential customers.

Regulated pricing mechanism enable earnings certainty. Historically, the movement of GMB's buying and selling prices was in line with the movement in the crude oil price and its related products. However, a regulated pricing mechanism has since been introduced in Mar 2009. In May 2011, the Government went on to set a fixed revision of RM3.00/mmbtu every six months starting from 1 Jun 2011 to Dec 2015, with the profit spread maintained at c.RM2.00/mmbtu. However, there has been no change in the buying and selling prices after that to date. 

New gas from Melaka RGT to lead growth. With the regulated profit  spread, the gas supply availability from Petronas is the key to its earnings. A New Gas Supply Agreement (NGSA) was signed with Petronas in Feb 2012 to obtain natural gas supply of up to 492MMScfd effective Jan 2013 for 10+5 years. This is effectively a 29%-increase in volume from the existing 382MMScfd agreement with Petronas, which will add 100MMScfd over 2013-2015. The additional gas supply is mainly from the Melaka Re-gasification Terminal (RGT), which will be charged at market price with the profit spread remaining unchanged at c.RM2.00/mmbtu. All these are based on back-toback 'take-or-pay' agreements with Petronas and its off-takers that minimises its earnings risk. 

Defensive earnings to offer good dividends. FY12 earnings are expected to come off 33% YoY on the lower revised prices effective Jun 2011. However, the new gas supply from Melaka RGT should boost FY13-FY14 estimates by 7%-15%. Its cash flows are strong, estimated at RM150m annually, which will enable GMB to pay at least 75% of its earnings. In addition, GMB is a net cash company, with the net cash expected to rise to RM462m in FY14 from RM327m in FY11. This works out to above average net yields of 4%-5% over the next  three years. The proposed RGT in Pengerang, Johor should add new supply thereafter, which will lead GMB earnings growth in the future.

New coverage with an OUTPERFORM.  We like GMB for its earnings quality and generous dividend payout. Hence, it offers a rare investment opportunity for investors look for both growth and  income qualities in a stock. We are initiating coverage on the stock with a OUTPERFORM rating at a price target of RM2.94/DCF share.

Source: Kenanga