Although management expects a higher volume growth in the next three years, we believe the upside is mitigated by the slower-than-expected contributions from new ventures. Having said that, the GCPT mechanism which frees GASMSIA from gas price movement risk is a positive. Come next year, it may take on the role as a shipper to enhance earnings under the TPA framework, but it is still premature to factor in the deal. It remains MARKET PERFORM with a target of RM3.18/DCF share.

Higher volume growth guidance. Last Friday, we attended GASMSIA’s 1H17 briefing post-2Q17 results release. Management shared with us its new volume growth guidance of 6%-6.5% p.a. for 2018-2020 from 3%-3.5% p.a. for 2016-2019 previously given the encouraging demand growth so far. In fact, 1H17 gas volume rose 10.1% to 88.4m mmbtu from 80.3m mmbtu in 1H16 and 5.2% from 84.0m mmbtu in 2H16. This was mainly driven by rubber, oleochemical, consumer products and glass sectors. Currently the rubber industry is the biggest volume off-taker with 32% in 1H17 and GASMSIA has added 21 new industrial customers YTD. The new volume growth guidance is on the back of higher capex of RM525m or 500km pipe lines over 2018-2020 from previously 2016-2019 capex budget of RM400m. It expects to add in 200 new industrial customers over the same period.

Non-regulated business still slow. Contributions from non-regulated segment remained insignificant, which was c.RM200k at PAT level in 1H17 against Group PAT of RM72.9m. Power tariff remains competitive relatively to its Combined Heat & Power (CHP) while lower crude oil prices make its Virtual Pipeline (VP) and BioGNG less attractive for user to switch for the latter’s alternative fuels. We believe the current business environment makes it difficult to achieve a meaningful 25-30% PAT contribution from the non-regulated business by 2020. However, we are not alarmed by this as the short-fall will be mitigated by the higher gas volume growth in the future.

TPA still not finalised. While there is less than half year to go before the implementation of Third Party Access (TPA) framework in Jan 2018, we understand that the new framework will unbundle the functions of distribution and shipper, which is currently bundled together, where the former is still regulated but the latter will take on market risk as the shipper sourced the gas supply at market price. GASMSIA believes that it is able to enhance earnings by being a shipper. However, the function of shipper only exists when the regulated gas prices are at the same parity as market price. At this juncture, it is premature to speculate on this, in our opinion.

No changes in estimates. Although management did not disclose margin spread for 2Q17, we believe the margin could have come off from the RM1.80/mmbtu that was achieved in the past 3-4 quarters. This was judged based on CapCon, tolling fees and gas volumes in 2Q17. Nonetheless, we believe this is just timing differences as under the Gas Cost Pass-through (GCPT) gas price movement risk is transferred to end-users. Despite higher volume growth guidance, we keep to our 3% growth for FY17-18, thus keeping our estimates unchanged for now.

Priced-in; Still MARKET PERFORM. Although management expects higher volume growth in the next three years, we believe this has been mitigated by the slower-than-expected contributions from its nonregulated business. Thus, all positives are priced in at this juncture. The stock is retained as MARKET PERFORM with unchanged price target of RM3.18/DCF share. It offers a decent yield of >3%. Upside risks to our call are stronger-than-expected sales volume and margin spread.

Source: Kenanga Research - 14 Aug 2017