GASMSIA again presented another strong set of quarterly results in 4Q16 primarily driven by higher sales volume as well as margin spread. With a base tariff which was set for 2017-2019, margin spread is certain under the GCPT framework, and should help to sustain its bottom-line. Thus, it will become a volume play again of which management is targeting 4%-4.5% growth p.a.. We raised our price target to RM3.04/DCF share from RM2.84/DCF share after adjusting for higher volume growth of 3% from 2% coupled with lower opex. OUTPERFORM reiterated.

4Q16 result above expectations. 4Q16 earnings beat expectations with full-year FY16 core earnings of RM168.5m coming 6%/14% above house/street?s estimates. We believe the main discrepancy was due to better margin spread, estimated at RM1.80/mmbtu, based on its latest sales volume, vs. our assumption of RM1.58/mmbtu. The FY16 core earnings were adjusted for RM3.4m impairment of trade receivable. A 2nd interim NDPS of 4.0 sen was declared (ex-date: 01 Mar; payment date: 20 Mar), totalling FY16 NDPS to 8.0 sen, implying 60% pay-out, which was lower than our estimate of 9.6 sen. A final NDPS is expected to declare in a later date to comply with its 75% dividend pay-out policy.

Better margin and volume to lead growth. Despite top-line dipping 2%, 4Q16 core profit leapt 15% QoQ to RM49.2m from RM42.7m in 3Q16, largely attributable to better margin spread as mentioned above coupled with a 4% growth in sales volume to 42.7m mmbtu from 41.2m mmbtu. The decline in revenue was mainly due to RM97.5m over- recovery of gas cost. YoY, 4Q16 and FY16 core earnings jumped 74% and 36% to RM49.2m and RM168.5m from RM28.2m and RM124.1m, respectively, last year. Again, this was mainly due to better margin spread as mentioned above as well as higher sales volume by 3% to 42.7m mmbtu and 164.2m mmbtu from 41.3m mmbtu and 159.1m mmbtu previously.

GCPT set; volume to lead growth. As the authority had already set a base tariff under the Gas Cost Pass-through (GCPT) mechanism for 2017-2019, margin spread has now become certain, hence it will become a volume play again. GASMSIA had targeted an annual growth of 4%-4.5% over 2017-2019 which we believe is not overly aggressive while the latest results showed that it posted higher margin spread and this could stay firm over the 3-year period which mean potential earnings upside. On the other hand, the non-regulated businesses, i.e., Virtual Pipeline (VP), Combined Heat & Power (CHP) and BioGNG which just started end of last year, are expected to contribute mildly to the group in the next two years with a meaningful 25%-30% PAT contribution only by 2020. We understand that there was no contribution from these businesses in FY16 at all.

Maintain OUTPERFORM. While we keep margin spread of RM1.58/mmbtu unchanged, we raised volume to 3% from 2% coupled with fine-turning on house-keeping, and upgraded FY17 estimates by 7%. We also introduced FY18 new numbers with earnings to grow at 3% on the back of 3% volume growth assumption. We believe our estimates are not overly aggressive as our volume growth assumption is lower than management?s target growth of 4%-4.5%. Post earnings revision, our new price target is now RM3.04/DCF share from RM2.84/DCF share. We maintain our OUTPERFORM call as we continue to like the stock for its earnings visibility on the back of the GCPT framework. Risks to our call include a sudden change in GCPT mechanism with downwards revision in margin spread and drop in sales volume.

Source: Kenanga Research - 16 Feb 2017