A seasonally low quarter, 1Q18 results came slightly below expectations owing to lower CapCon recognised in accordance with MRFS15. Nonetheless, this is not alarming being changes made in accordance with accounting standard. In fact, the core business saw an encouraging 9% YoY growth in 1Q18 sales volume. It remains a volume play with GCPT framework in place. The stock remains an OUTPERFORM at RM3.05/DCF share.

1Q18 slightly below. At 22% of both house/street’s FY18 estimates, 1Q18 core profit of RM40.2m came in slightly below expectations, which were primarily due to lower Capital Contribution (CapCon) recognised in accordance with MRFS15. Nonetheless, the sales volume of 45.9m mmbtu was fairly on track. No dividend was declared in 1Q18 as expected as it usually pays half-yearly dividends.

Affected by lower CapCon. 1Q18 core profit plunged 48% sequentially to RM40.2m from RM77.1m on the back of 2% decline in revenue to RM1.44b from RM1.47b in 4Q18. This was attributable to: (i) lower CapCon recognition of RM0.8m from RM16.5m in accordance with MRFS15, (ii) weaker sales volume of 46.9m mmbtu from 48.9m mmbtu due to seasonality, and (iii) thinner margin spread estimated at c.RM1.90/mmbtu from c.RM2.00 /mmbtu previously. Note that 4Q17 CapCon was exceptionally high but with MRFS15, CapCon’s figures are expected to be fairly stable as opposed to lumpy amounts previously. On the other hand, associate income fell to RM880k from RM2.9m previously as the 4Q17 numbers were largely due to contribution from Combined Heat & Power (CHP) where the unit recognised full-year FY18 profit in 4Q17.

YoY results largely driven by volume growth. 1Q18 core profit rose 24% YoY from RM32.3m as revenue grew 21% over the year from RM1.19b. The improved results were principally due to 9% growth in sales volume to 46.9m mmbtu from 43.2m mmbtu. Meanwhile, the higher revenues were due to the scheduled half-yearly gas selling price hikes as average effective gas selling price of RM32.52/mmbtu in 1H18 vs. RM26.71/mmbtu in 1H17, in addition to higher sales volume mentioned above. Meanwhile, associate income rose slightly to RM880k in 1Q18 from RM239k a year ago.

GCPT unlikely to change. Like the other two regulated utilities companies, TENAGA (OP; TP: RM17.90) and PETGAS (OP; TP: RM22.80), GASMSIA also faced the concern of any changes in Gas Cost Pass-through (GCPT) mechanism that may affect GASMSIA negatively under the PH government’s populist policy. In our opinion, it is unlikely that the authority will review the base-tariff under the current GCPT’s regulatory period of 2017-2019 as it does not impact the public directly given that it deals only with businesses.

Reiterate OUTPERFORM. Given the soft 1Q18 results, we trimmed FY18-FY19 estimates by 4% each as we cut CapCon’s assumption to RM10m from RM20m previously in accordance to MRFS15. Thus, our new target price is also reduced to RM3.05/DCF share from RM3.20/DCF share to account for lower earnings as well as the change in valuation base year to CY19 from CY18. However, we remain optimistic on GASMSIA for its steady volume growth coupled with the margin spread certainty. As such, the stock remains an OUTPERFORM. It offers a decent yield of 3%-4%. Risks to our optimistic call are (i) weaker-than-expected sales volume, and (ii) lower margin spread.

Source: Kenanga Research - 30 May 2018