4Q18 results are within expectations with sales volume growing strongly by 7% sequentially. However, flattish earnings implied that margin spread could be tapering off but GCPT is ensuring a cost transfer in the coming quarters under the IBR framework. Thus, it has become a volume- play stock. However, all these are already priced-in, in our opinion. Hence, we keep our MARKET PERFORM call with an unchanged target price of RM3.05/DCF share.

FY18 earnings in line. 4Q18 results came within expectations, with core profit flattish sequentially at RM41.4m, tallying FY18 core profit to RM170.4m which came 4%/5% below house/street’s estimates. The 4Q18 core profit was largely adjusted for RM9.4m write-back of impairment of trade receivable. Meanwhile, GASMSIA announced 2nd interim NDPS of 4.5 sen (ex-date: 07 Mar; payment date: 28 Mar) in 4Q18, which is higher than 4.0 sen paid in 4Q17, totalling FY18 NDPS to 9.0 sen which is also higher than 8.0 sen paid in FY17.

Flattish QoQ earnings albeit higher volume. Although revenue jumped 12%, 4Q18 core profit was flattish sequentially at RM41.4m which we believe could be due to lower margin spread possibly at the lower end of the targeted range of RM1.80/mmbtu-RM2.00/mmbtu. The 12% hike in revenue was led largely by higher sales volume, which rose 7% to 51.2m mmbtu from 48.1m mmbtu previously. Meanwhile, the CapCon and Tolling Fees were flattish at RM0.8m and RM3.1m from RM3.6m and RM3.7m, respectively, in 3Q18.

However, volume growth led FY18 results. On YoY comparison, 4Q18 core profit fell 33% from RM61.5m in 4Q17 despite revenue rising 19% which was due to higher sales volume and average effective gas selling price. The fall in earnings was owing to a one-off catch-up Gas Cost Pass Through (GCPT) adjustment made in 4Q17 which led to a higher margin spread then. Meanwhile, sales volume rose 5% from 48.9m mmbtu in 4Q17 with higher average effective gas selling price of RM32.69/mmbtu in 2H18 as opposed to RM26.46/mmbtu in 2H17 on the scheduled half-yearly price hike. YTD, FY18 core profit grew 3% to RM170.4m from RM165.6m in FY17 as sales volume rose 5% to 193.8m mmbtu from 183.9m mmbtu last year.

GCPT to ensure margin spread certainty. The latest base-tariff review in December saw the effective gas selling price increasing 0.7% to RM32.92/mmbtu in 1H19, which includes a RM0.23/mmbtu surcharge, from RM32.69/mmbtu in 2H18. As the Regulatory Period 1 (PR1) will be ending this year, we believe the authority will continue with the GCPT in Regulatory Period 2 (PR2) which may see GASMSIA getting a lower asset return from 7.5% currently as TENAGA (OP; TP: RM16.45) experienced a lower return of 7.3% in RP2 from 7.5% in RP1. Nonetheless, we remain positive on GCPT as it ensures GASMSIA’s margin spread certainty at between RM1.80/mmbtu and RM2.00/mmbtu currently.

Maintain MARKET PERFORM. We fine-tuned FY19 estimates by +0.5% with full-year adjustment on FY18 actual results and at the same time introduced FY20 forecasts with earnings set to grow at 2.1% largely back by 3% volume growth assumptions. Going forth, 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, in our opinion, we maintain our MARKET PERFORM call with an unchanged target price of RM3.05/DCF share, implying FY19E PER of 21x. 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 Feb 2019