Although sequentially 3Q18 results were weaker on higher overhead costs, it matched expectations and is still a solid result with continuous healthy volume growth. With the IBR in place, margin spread certainty is enabled with the GCPT framework. Thus, it has become a volume-play stock. However, all these are already priced-in, in our opinion. Thus, we keep our MARKET PERFORM call with an unchanged target price of RM3.05/DCF share.

9M18 results in line. 3Q18 results came within expectations, although core profit fell 14% sequentially to RM41.4m, totalling YTD 9M18 core profit, which rose 25% YoY to RM129.7m, accounted for 73%/71% of house/street’s FY18 estimates. There was no dividend declared in 3Q18, which was expected as it pays half-yearly dividend.

Higher opex suppressed sequential results. 3Q18 core profit fell 14% QoQ to RM41.4m from RM48.1m in the preceding quarter despite revenue rising 4% to RM1.56b from RM1.50b previously. This was due to higher operating expenses such as repair and maintenance, which mitigated the rise in revenue that was led by a 1% higher sales volume to 48.1m mmbtu from 47.6m mmbtu. The higher revenue was also partly due to higher average effective tariff of RM32.69/mmbtu in 2H18 from RM32.52/mmbtu in 1H18. Meanwhile, the CapCon and Tolling Fees were flattish at RM3.6m and RM3.7m from RM0.8m and RM3.8m, respectively, in 2Q18.

However, volume growth boosted YoY results. On YoY comparison, 3Q18 core profit grew 14% from RM36.5m in 3Q18 while revenue rose 12% from RM1.39b. This was largely due to higher sales volume by 3% from 46.6m mmbtu in 3Q17 while the average effective gas selling price was higher at RM32.69/mmbtu in 2H18 as opposed to RM26.46/mmbtu in 2H17 on the scheduled half-yearly price hike. YTD, 9M18 core profit jumped 25% to RM129.7m from RM104.1m as revenue leapt 16% to RM4.49b from RM3.86b in 9M17. This was again due primarily to the same reasons mentioned above as sales volume grew 6% to 142.6m mmbtu from 135.0m 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 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 at between RM1.80/mmbtu and RM2.00/mmbtu

Maintain MARKET PERFORM. We are still optimistic on GASMSIA for its steady volume growth coupled with the margin spread certainty. However, as share price had already priced-in the above, 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 - 15 Nov 2018