4Q17 results were impressive with record sales volume on almost full capacity utilisation. We believe it should be able to secure additional gas supply to support future earnings growth as the RGT in Melaka is currently under utilised. With the GCPT framework in place, certainty of margin spread is high. Thus, GASMSIA is now a volume play. The stock remains an OUTPERFORM with a revised target price of RM3.20/DCF share.

4Q17 above expectation. GASMSIA reported 4Q17 results, which beat expectation with core earnings rising 63% sequentially to RM77.1m firming FY17 core profit to RM199.1m which came 21% above house forecast as well as market consensus. This was due to higher sales volume of 183.9m mmbtu against our assumption of 169.2m mmbtu as well as higher CapCon. It declared 2nd interim NDPS of 4.0 sen (ex-date: 02 Mar; payment date: 27 Mar) totalling YTD FY17 NDPS to 8.0 sen which is lower than 12.9 sen or 97% pay-out in FY16. Based on historical trends, we expect a final NDPS amounting to 3.52 sen (based on our assumption of 75% payout) to declare in May.

Volume and CapCon-led earnings growth. 4Q17 core profit jumped sharply by 63% QoQ to RM77.1m from RM47.3m on the back of 5% hike in revenue to RM147b from RM1.40b previously. The impressive set of results was driven mainly by: (i) higher sales volume by 5% to 48.9m mmbtu from 46.6m mmbtu, and (ii) stronger Capcon contribution by 45% to RM16.5m from RM11.3m. Meanwhile, EBITDA margin improved to 7% from 5% previously. With the adjustment for higher sales volume and Capcon, the margin spread is estimated at RM1.90/mmbtu. On the other hand, associate income improved significantly to RM2.9m from RM0.2m in 3Q17 largely due to contribution from Combined Heat & Power (CHP).

YoY results largely driven by volume growth. Both 4Q17 and FY17 core earnings leapt 57% and 18% to RM77.1m and RM199.1m on the back of 40% and 32% hike in revenue as sales volume grew 15% and 12% to 48.9m mmbtu and 183.9m mmbtu, respectively. In fact, the 183.9m mmbtu sales volume reported in FY17 is equal to 490mmscfd, which almost hit the 492mmscfd guaranteed supply by Petronas. We understand that the new supply was taken by the rubber, F&B, oleo, textile and glass sectors. Meanwhile, the higher revenues were due to the scheduled half-yearly gas selling price hikes, besides higher sales volume.

FY18 estimates upgraded. Although it already almost fully utilise Petronas’ guaranteed supply, we believe GASMSIA should be able to secure additional supply from Petronas given that the Melaka RGT is under-utilised currently. As such, we still expect volume growth of 3% and with higher contribution from CHP, FY18 estimates are revised upwards by 9% to RM185.6m, which is lower than FY17 of RM199.1m as CapCon revenue is expected to soften. On the other hand, we introduce FY19 forecasts with earnings set to grow 3% as we expect 3% growth in sales volume.

OUTPERFORM retained. We remain optimistic on GASMSIA given the steady volume growth coupled with the margin spread certainty under the Gas Cost Pass-through (GCPT) mechanism for 2017-2019. As such, its earnings are mainly determined by sales volume. Post results and earnings adjustment, we raised price target to RM3.20/DCF share from RM3.18/DCF share previously. The stock remains an OUTPERFORM. It offers a decent yield of >3%. Risks to our upgraded call are (i) weaker-than-expected sales volume and (ii) lower margin spread.

Source: Kenanga Research - 19 Feb 2018