1Q19 results are satisfactory in which we still see sales volume growing 2% YoY with margin spread maintained at RM1.80-2.00/mmbtu. Margin spread remains the key determining factor to earnings and the spread may go lower in the new RP2 which will start in 2020 as we see such precedent in TENAGA. However, we believe this has already been priced in by the market. We keep our MP call for decent yield with an unchanged target price of RM3.05/DCF share.

1Q19 results on track. 1Q19 results came in within expectations with core profit dipping slightly by 1% sequentially to RM41.2m that made up 22% of house/street’s estimates. No dividend was declared in 1Q19 as expected as it only pays half-yearly dividends.

Sequential results dipped on lower volume… 1Q19 core profit fell marginally by 1% QoQ from RM41.4m on the back of 1% dip in revenue. This is despite lower sales volume, which fell 7% to 47.9m mmbtu from 51.2m mmbtu in 4Q18; thus, the smaller percentage of decline in bottom-line could be due to the normalisation of margin spread from the lower end of the targeted range of RM1.80-2.00/mmbtu in the preceding quarter. During the quarter, the CapCon and Tolling fees were flattish at RM0.9m and RM2.9m in 1Q19 as opposed to RM0.8m and RM3.1m, respectively, in 4Q18.

... but improved sales volume pushed yearly results higher.

Nonetheless, the 2% improvement in sales volume from 46.9m mmbtu in 1Q18 helped to push 1Q19 core earnings higher by 4% YoY from RM39.5m in 1Q18. The improved earnings were also partly attributable to lower effective tax rate of 25% vs. 27% previously. On the other hand, the 20% jump in revenue was, apart from higher sales volume, mainly driven by the half-yearly scheduled hike in gas selling prices. The average effective gas selling price for 1H19 is RM32.92/mmbtu (scheduled base-tariff of RM32.69/mmbtu) as opposed to RM32.52/mmbtu (RM30.90/mmbtu) in 1H18. Meanwhile, 1Q19 CapCon and Tolling fees were fairly flattish as compared to RM0.8m and RM3.6m in 1Q18.

Lower margin spread in RP2? So far, the Gas Cost Pass Through (GCPT) framework has ensured earnings certainty as the margin spread is capped at RM1.80-2.00/mmbtu in the Regulatory Period 1 (PR1) in 2017-2019 based on regulated asset base return of 7.5%. However, judging from TENAGA’s (MP; TP: RM13.30) case, GASMSIA may see lower return of 7.3% in Regulatory Period 2 (RP2), which runs from 2020 to 2022, from 7.5%, which was exactly the case for TENAGA. This could reduce the margin spread to c.RM1.50- 1.70/mmbtu and bring down our FY20 estimates by 5% and DCF valuation by RM0.20/share. For now, we keep our estimates unchanged in which we have assumed a margin spread of RM1.80- 2.00/mmbtu in our FY20 forecasts.

Maintain MARKET PERFORM. Although there is uncertainty over the margin spread in the new RP2, we remain optimistic on its steady volume growth and effort to grow the new non-regulated assets which are still fairly small for now, which would help to mitigate any dip in margin spread. We believe the market should have priced in the uncertainty as its share price has been hovering at current level for the past one year despite improving results. Thus, we maintain our MARKET PERFORM call, which is supported by a decent yield of 3- 4%. Our target price is maintained at RM3.05/DCF share, implying FY20E PER of 20.8x which is fairly in-line with 3-year average of 20.3x. Upside risk to our call is sales volume continuing to be stronger than expected.

Source: Kenanga Research - 16 May 2019