GASMSIA produced another solid set of quarterly results in 3Q16 primarily driven by higher sales volume, which saw volume rising 2% sequentially. The results beat our forecast as we had assumed 24% tax rate while the actual 9M16 effective tax rate was lower at 22%. Our new price target is now raised to RM2.84/DCF share from RM2.77/DCF share. We maintain our OUTPERFORM call as the new IBR framework ensures better earnings visibility.

3Q16 results above expectations. At 82%/87% of house/street’s FY16 full-year estimates, 9M16 core profit of RM119.1m beat expectations. The main discrepancy between our forecast and the actual results was because we assumed higher taxation rate of 24% in FY16 while the actual effective tax rate in 9M16 was 22%. The 9M16 core earnings were adjusted for RM5.7m impairment of trade receivables. No dividend was declared as expected.

Strong earnings led by volume growth. 3Q16 core profit rose 11% sequentially to RM43.2m while revenue jumped 10% from 2Q16, which was attributable to higher average gas selling price of RM27.05/mmbtu effective July 2016 from RM25.53/mmbtu previously. The strong bottom line was mainly led by a 2% hike in sales volume to 41.3m mmbtu from 40.3m mmbtu. In addition, lower operating cost mostly from the reversal of accrued expenses helped to improve 3Q16 results.

Same reason for YoY comparison. Similarly, 3Q16 and 9M16 core earnings also rose by 28%/24% YoY to RM43.2m/RM119.1m from last year which was primarily attributable to higher sales volume, which rose 2%/3% to 41.3m/121.2m mmbtu from 40.3m/117.7m mmbtu. The growth in revenue by 19%/22% to RM1.07b/RM3.00b was partly due to higher gas selling, which was reviewed half-yearly.

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 in 2H16. However, the initial profit contributions to the group is immaterial at <5% in the first two years with a meaningful 25%-35% PAT contribution only 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. We raised FY16/FY17 estimates by 9% each as we revised our effective tax rate to 22% while the cash flow reflected the recent issuance of a total of RM101m Islamic borrowing early this month. This also contributed to higher price target of RM2.84/DCF share from RM2.77/DCF share previously. We keep our OUTPERFORM rating. 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 - 18 Nov 2016