GASMSIA presented another strong set of 2Q16 results with core earnings rising 6% sequentially on the back of 2% hike in gas sales volume. This is not a surprise to us given the short working quarter in the preceding quarter. With the IBR framework in place, it offers better earnings visibility, which is not fully reflected in its share price yet, in our view. Thus, we reiterate our OUTPERFORM rating with higher revised price target of RM2.77 on DCF per share as risk factor has reduced following the recent OPR cut. The stock also offers a decent yield of c.4%.

2Q16 in line. At 52% of our FY16 full-year estimates, 1H16 core profit of RM75.9m came in within our expectation but beat market consensus at 58% of FY16 estimate. The 1H16 core earnings were adjusted for RM6.2m impairment of trade receivables. Judging from the 1H16 revenue of RM1.93b which accounted for 53%/47% of house/street’s estimates, we believe the market could have understated the margin spread. It declared 1st interim NDPS of 4.0 sen in 2Q16 (ex-date: 26 Aug; payment date: 21 Sep) which is higher than the 3.5 sen paid in 2Q15.

Another solid sequential growth. 2Q16 core profit rose 6% QoQ to RM39.0m from RM36.9m in 1Q16 as revenue inched up 1% to RM973.6m thanks largely to a 2% rise in sales volume to 40.3m mmbtu from 39.7m mmbtu. The lower sales volume in 1Q16 was owing to the shorter working month of Feb. There was no change in average gas selling price of RM25.53/mmbtu throughout 1H16.

Earnings mainly led by volume growth. Similar to the sequential results, the YoY comparison results were also helped by higher gas sales volume, which rose 2% in 2Q16 and 3% in 1H16. This brought 2Q16 and 1H16 core earnings higher by 16% and 22% from RM33.7m and RM62.2m, respectively. On the other hand, revenues were 22% and 24% higher in 2Q16 and 1H16, respectively, which were mainly attributed to higher average gas selling price of RM25.53/mmbtu in 1H16 vs. RM19.77/mmbtu previously in addition to the increase in sales volume mentioned above. Nonetheless, the higher selling price did not translate into the same proportional impact to bottom line given that spread margin was maintained at c.RM1.58/mmbtu.

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, their 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 with commencement expected by 3Q16. However, the initial profit contributions to the group is immaterial at <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.

OUTPERFORM maintained. While maintaining our FY16E/FY17E numbers, we are revising our discount factor to 7.3% from 7.6% on adjustment of risk factor following the recent OPR cut; thus, new price target is being upgraded to RM2.77 on DCF per share from RM2.62 previously. Reiterate OUTPERFORM. We continue to like the stock for its earnings visibility on the back of the IBR framework. It also offers a decent yield of c.4%. Risks to our call include a sudden change in gas cost-pass through mechanism with downwards revision in margin spread and drop in sales volume.

Source: Kenanga Research - 12 Aug 2016