3Q17 was another strong quarter for GASMSIA with earnings rising 12% sequentially, which was largely driven by volume growth. This is not unexpected given the implementation of GCPT with gas price movement risk is now transferred to end users; thus, it has become a volume play for GASMSIA. The stock faced selling pressure of late, following a strong rally earlier, which offers a good opportunity to accumulate this resilient stock. Thus, we upgrade the stock to OUTPERFORM from MARKET PERFORM with an unchanged target price of RM3.18/DCF share.

3Q17 in line. GASMSIA reported 3Q17 results with core earnings rising 12% sequentially to RM47.3m totalling 9M17 core profit to RM122.0m which accounted for 74%/75% of house/street’s FY17 fullyear forecasts. No dividend was declared in 3Q17 as expected as it usually pays half-yearly dividends.

Volume-led earnings growth. 3Q17 core profit rose 12% QoQ to RM47.3m from RM42.1m in 2Q17 on the back of a 9% hike in revenue to RM1.40b from RM1.29b previously. The improvement in the bottomline was largely driven by higher sales volume while higher top-line was attributed to higher revised base tariff of RM28.05/mmbtu which is scheduled every half-yearly from RM26.71/mmbtu in 1H17, and higher gas volume. With total Capcon and tolling fees of RM15.3m in 3Q17 from RM14.2m in 2Q17, higher gas volumes coupled with EBITDA margin, which was maintained at 5%, we believe the margin spread was likely lower than RM1.80/mmbtu level that was achieved in the past 4-5 quarters.

YoY results also led by volume growth. Both 3Q17 and 9M17 core profits grew 11% and 2% to RM47.3m and RM122.0m, respectively, from RM42.7m an RM119.3m last year which were largely contributed to higher gas volume sold while the strong top-line growth of 31% and 29% was led primarily by the said scheduled half-yearly gas selling price hikes. In fact, the growth in revenue was also partly attributed to combined higher Capcon and Tolling fees of RM15.3m and RM34.3m in 3Q17 and 9M17 from RM7.9m and RM26.8m in 3Q16 and 9M16, respectively.

Margin spread is certain under GCPT. 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 has become a volume play again. On the other hand, the non-regulated businesses, i.e., Virtual Pipeline (VP), Combined Heat & Power (CHP) and BioGNG which have 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.

Upgrade to OUTPERFORM. Share price of GASMSIA had fallen 8% in the past three months on profit taking after a 21% rally in the first eight months of the year. We believe it is time again to accumulate this stock following the weakness. With the GCPT mechanism in place, gas price risks are now being transferred to end users. Thus, we upgrade the stock to OUTPERFORM from MARKET PERFORM with unchanged price target of RM3.18/DCF share and estimates. It offers a decent yield of >3%. Risks to our upgrading call are weaker-thanexpected sales volume and margin spread.

Source: Kenanga Research - 10 Nov 2017