The disappointing 1Q17 results were non-operational as CapCon was substantially lower in the current quarter. In addition, there was a one-off tolling fee in 4Q16. Having said that, 1Q17 was not a bad quarter as both gas volume and spread margin remained healthy. In fact, there is potential upside given the persistent high spread margin in the past few quarters. Nonetheless, we cut the stock to MARKET PERFORM with a revised target price of RM3.18/DCF share following a strong price rally of 25.5% YTD.

1Q17 below. At 19%/20% of house/street’s FY17 estimates, 1Q17 core profit of RM32.6m fell short of expectations as (i) we had overestimated tolling fees at RM28.4m for FY17 whereas the new fee base should be c.RM20m a year, (ii) the asset contributed from customer (CapCon) was fairly low at RM1.3m in 1Q17 vs. our FY17 assumption of RM20m, and (iii) effective tax rate of 25.5% in 1Q17 vs. our FY17 assumption of 22%. Nonetheless, core operation numbers remained healthy with sales volume rising 9% YoY while margin spread was not far off from the preceding quarter of RM1.80/mmbtu. There was no dividend declared in 1Q17 as it usually pays a halfyearly dividend.

Not a bad quarter operationally. Despite top-line growing 13% QoQ and 23% YoY, which were due primarily to the scheduled half-yearly gas selling price hikes, 1Q17 core earnings contracted 34% QoQ and 12% YoY respectively to RM32.6m from RM49.2m in 4Q16 and RM36.9m in 1Q16 respectively. The decline in earnings was attributed to non-operational as there was a c.RM10m one-off tolling fees adjustment in 4Q16 while 1Q17 CapCon was only RM1.3m vs. RM8.0m in 4Q16 and RM6.2m in 1Q16. These two items are included in revenue, which flows immediately into bottomline. In fact, gas volume growth improved slightly QoQ at c.43m mmbtu from 42.7m mmbtu in 4Q16 and jumped 9% YoY from 39.7m mmbtu last year. With these gas volumes, margin spread was estimated at RM1.80/mmbtu which was quite similar to that of 4Q16 but higher than c.RM1.60/mmbtu in 1Q16.

Margin spread seems higher than expected. As the EC had already set a base tariff under the Gas Cost Pass-Through (GCPT) mechanism for the regulatory period of 2017-2019, margin spread has now become certain, hence it will become a volume play again. In fact, the margin spreads were around RM1.80/mmbtu in the past few quarters as compared to RM1.58/mmbtu during the pre-trial period in 2015. Therefore, we believe this could be the new base under the current regulatory period based on the 7.5% WACC calculation, suggesting potential earnings upside. On the other hand, the nonregulated 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.

Cut to MARKET PERFORM. While keeping key assumptions unchanged, we trimmed tolling fee to RM20m from RM28.4m thus FY17-FY18 estimates are downgraded by 3%. We believe our estimates are not overly aggressive as our volume growth assumption of 3% is lower than management’s target growth of 4%-4.5%. We also downgraded GASMSIA to MARKET PERFORM from OUTPERFORM following its recent strong rally, which saw share price up sharply by 25.5% YTD against FBMKLCI’s 7.6%. New price target is now RM3.18/DCF share from RM3.04/DCF share as we rolled it over valuation base-year to CY18. Risks to our downgrading call are stronger than expected sales volume and margin spread.

Source: Kenanga Research - 11 May 2017