GASMSIA presented a good set of 2Q18 results, which saw 5% YoY sales volume growth as well as better margin spread. With the IBR in place, margin spread certainty is enabled with the GCPT framework. Thus, it has become a volume-play stock. Nonetheless, all these are already priced-in, thus we maintain our MARKET PERFORM recommendation with an unchanged target price of RM3.05/DCF share.

1H18 matched expectations. 2Q18 results came within expectations with core profit rising 20% QoQ to RM48.1m, totalling 1H18 core profit to RM88.3m which accounted for 50%/48% of house/street’s FY18 estimates. It declared first interim NDPS of 4.5 sen in 2Q18, (ex-date: 28 Aug; payment date: 26 Sep) which is higher than 4.0 sen paid in 2Q17.

Earnings led by volume and margin. 2Q18 core profit rose remarkably by 20% sequentially to RM48.1m from RM40.2m on the back of 5% hike in revenue to RM1.50b from RM1.44b. This was due to higher sales volume of 47.4m mmbtu from 46.9m mmbtu while the higher EBITDA margin of 5.4% from 4.7% indicates that margin spread could be at its higher range of RM1.80/mmbtu-RM2.00/mmbtu. Meanwhile, interest expense jumped to RM4.3m from RM0.3m previously due to the drawdown of RM500m Islamic Commercial Paper. On the other hand, the CapCon and Tolling Fees were fairly flattish at RM0.8m and RM3.8m from RM0.8m and RM3.6m in 2Q17, respectively.

Volume growth boosted YoY results. 2Q18 core earnings leapt 32% YoY from RM36.4m in 1Q18 while revenue grew 17% from RM1.28b. This was primarily due to higher sales volume by 5% from 45.2m mmbtu in 2Q17. The higher revenues were attributable to higher sales volume coupled with the scheduled half-yearly gas selling price hikes as the average effective gas selling price was registered at RM32.52/mmbtu in 1H18 vs. RM26.71/mmbtu in 1H17. YTD, 1H18 core profit jumped 30% to RM88.3m from RM67.7m on the back of 19% hike in revenue. The improved results were due to the abovementioned higher sales volume by 7% to 94.3m mmbtu from 88.4m mmbtu as well as the scheduled half-yearly gas selling price hikes.

GCPT unlikely to change. With TENAGA (OP; TP: RM17.90) getting its first Imbalance Cost Pass-through (ICPT) surcharge in 2H18 and the continuity of Incentive Based Regulation (IBR), we believe that the government is unlikely to review the base-tariff under the current Gas Cost Pass-through (GCPT) regulatory period of 2017-2019. Furthermore, it does not impact the public directly given that it deals only with businesses, which ensure GASMSIA’s margin spread certainty.

Maintain MARKET PERFORM. We remain optimistic on GASMSIA for its steady volume growth coupled with the margin spread certainty. However, as share price already priced-in, we maintain our MARKET PERFORM with an unchanged target price of RM3.05/DCF share. It is supported by a decent dividend yield of 3-4%. Risk to our call is sales volume continuing to be stronger than expected.

Source: Kenanga Research - 09 Aug 2018