We take comfort with GASMSIA’s earnings prospects, at least for the next six months, following a meet-up with its management yesterday where we learnt that the profit margin spread is likely to be maintained for now. Even then, we remain UNDERPERFORM on GASMSIA due to its stretched valuation as the current price is ahead of our price target of RM3.41/DCF share. While the new margin spread is estimated at RM2.01/mmbtu, future margin spread is non-static dependent on the business volume while the blended mix between LNG price and regulated gas price would be the key deciding factor. Akin to TENAGA, the tariff for GASMSIA will be reviewed half-yearly with a yearly review to address the adjustment for volume differential. This implies future earnings might be lumpy due to timing issue but should be constant on a normalised basis. Due to the insignificant change in margin spread, we keep our forecast unchanged for now pending 1Q14 results, which will be released next month.

Profit margin spread to stay for now. Yesterday, we attended Gas Malaysia Bhd’s (GASMSIA) analyst briefing in regards to the new tariff revision which was announced on 11 April. Management revealed the new selling gas price of RM19.32/mmbtu is a blended price which is based on: (i) regulated gas price of RM15.55/mmbtu (84% blended); up RM1.50/mmbtu from RM14.05 /mmbtu, (ii) market price of LNG at RM44.88/mmbtu (16% blended), and (iii) total gas volume of 155m mmbtu. Nonetheless, there is no disclosure on the purchase price. Taking cue from the actual 6% LNG blended mix in the purchase price calculation as guided by management, the blended purchase price is estimated at RM17.31/mmbtu, implying a profit margin spread of RM2.01/mmbtu. This is merely 1 sen off from the current spread of RM2.02/mmbtu.

Tariff to be reviewed every six months. We had earlier assumed that its margin spread could reduce to RM0.99/mmbtu should GASMSIA run at 100% capacity with a blended mix of 84.5% for regulated gas and 15.5% for LNG. (please refer to our report dated 14 April 2014) Based on the guided 6% actual LNG and 155m mmbtu gas volume, the reference for utilisation rate to calculate the new purchase price could be c.90% only. In our opinion, the utilisation rate could be a key determining factor to margin spread as it will affect the usage of LNG since the regulated gas supply is fixed at 382mmscfd. For now, the tariff will be reviewed every six months with the regulated gas price to increase by RM1.50/mmbtu while LNG adjusts to market price. On the other hand, management expects its earnings to sustain on a normalised basis as this will be taken care off by the yearly review to address the adjustment for volume differential between anticipated and actual volumes.

Adhere to 75% dividend payout policy. Management has also revealed its 5-year budgeted capex of RM733.3m for 2014-2018. The budget, which is fairly huge as compared to its previous capex spent, is for new areas/replacements/extensions. Part of this capex is expected to be claimed back from clients. In FY13, GASMSIA posted RM32m capital contributions from clients as against its actual capex spent of RM76.4m. Although the 5-year capex plan is huge, management still expects to pay at least 75% of its earnings as dividend in the future.

Still UNDERPERFORM. GASMSIA’s future earnings are likely to be lumpy due to timing issue. While the yearly review should be able to address this, the forward purchase/selling price is non-static as before as it involves the LNG market price and the gradual removal of subsidy of regulated gas price. The question now is its ability to sustain profit margin spread going forward given the dynamic of LNG prices. We reckon that the additional 40mmscfd next year and new ventures namely Combined Heat and Power (CHP) and Compressed Natural Gas (CNG) are new earnings drivers, but we are reluctant to change our UNDERPERFORM view given its stretched valuation against our price target of RM3.41/DCF share.

Source: Kenanga