GASMSIA is off to a strong start to FY16 with 1Q16 core earnings soaring 30% YoY helped by higher sales volume, which is not a surprise to us. With the IBR framework in place, it offers better earnings visibility, which is not reflected in its share price, in our view. Thus, we maintain our OUTPERFORM rating with lower price target of RM2.62/DCF share as we roll over valuation base-year to CY17. The stock also offers a decent yield of c.4%.

1Q16 no surprises. At 25% of our FY16 full-year estimate, 1Q16 core profit of RM36.9m came in within our expectation but beat market consensus at 28% of FY16 estimates. The core earnings were adjusted for RM5.5m impairment of trade receivables. As it traditionally pays dividends twice a year in 2Q and 4Q, there was no dividend declared in 1Q16.

A strong start to FY16. Despite revenue falling 18% to RM961.0m, 1Q16 core earnings jumped 31% QoQ to RM36.9m from RM28.2m in the preceding quarter. The much weaker 4Q15 results were due to the oneoff additional billing for price differential between market price and regulated price for LNG. Stripping out the one-off billing, revenue was still higher due to a 17% hike in gas selling price to RM25.32/mmbtu effective Jan 2016 from RM21.8/mmbtu. However, sales volume fell 4% to 39.7m mmbtu from 41.3m mmbtu due to a shorter working month in Feb.

YoY growth on higher sales volume. On a YoY comparison basis, 1Q16 core profit soared 30% from RM28.5m in the corresponding quarter last year on the back of 26% hike in revenue from RM761.6m. This was mainly attributable to a 5% growth in sales volume to 39.7m mmbtu from 37.9m mmbtu. In addition, taxation fell 12% to RM7.5m from RM8.5m while share of loss from associate incomes interest expenses dropped 92% to RM0.1m from RM1.7m previously, which also helped to push up earnings. Meanwhile, besides the 5% hike in sales volume, the higher revenue was also due to higher selling price of RM25.53/mmbtu from RM19.77/mmbtu previously.

Non-regulated business to kick start in 2H16. Given that earnings growth for the regulated gas business will be capped by a return of 8% WACC, the ventures in non-regulated business, i.e. (i) Virtual Pipeline (VP), (ii) Combined Heat & Power (CHP), and (iii) BioCNG, which facilities started construction two years ago, are timely to lead earnings growth as these businesses will start operations by 2H16. However, the initial profit contributions to the group is immaterial of <5% in the first two years and a meaningful 25%-35% PAT contribution by 2020. Meanwhile, the Gas Cost Pass-through mechanism will ensure earnings certainty for the regulated gas business while the planned RM400m capex over 2016- 2019 could boost earnings as returns are based on a higher asset base.

Keep OUTPERFORM. While maintaining our FY16E/FY17E numbers unchanged, we are rolling over our valuation base-year to CY17, thus new price target of RM2.62/DCF share from RM2.68/DCF share previously. We continue to like the stock for its earnings visibility on the back of the IBR framework. It also offers a decent yield of 4%. Reiterate OUTPERFORM. Risks To Our Call include a sudden change in gas costpass through mechanism with downward revision in margin spread and drop in sales volume.

Source: Kenanga Research - 12 May 2016