GASMSIA reported yet another strong set of results for 2Q19 with core profit rising 19% sequentially to RM49m, which matched expectations. However, as it is in the final year of RP1, fear of cut in rate of return will cap share prices from going higher. Still, we believe impact from the cut, if any, would be immaterial. This should have already been priced in, being anticipated by the market. Keep our MP call with a revised target price of RM3.00/DCF share for its above average yield of 4-5%.

2Q19 results met expectations. At 49%/48% of house/street’s FY19 estimates, 1H19 core profit of RM90.2m which rose 4% YoY came within expectations. It declared first interim NDPS of 4.8 sen (ex-date: 08 Oct; payment date: 30 Oct) in 1H19 which is higher than 4.5 sen paid in 1H18.

Higher volume and lower opex boosted sequential results. 2Q19 core profit jumped 19% QoQ to RM49.0m from RM41.2m previously on the back of 1% rise in revenue which was largely led by higher sales volume. 2Q19 gas volume rose by 3% to 49.3m mmbtu. Besides higher sales volume, lower opex also attributed to the higher bottomline. We believe the strong set of results also rode on margin spread at the higher end of the targeted range of RM1.80-2.00/mmbtu. Meanwhile, CapCon and Tolling fees were fairly flattish at RM0.9m and RM2.9m, respectively, in 2Q19. On the other hand, associate incomes turned to losses at RM0.6m from profit of RM1.8m in 1Q19.

Likewise, higher volume also led yearly results higher. Similarly, 2Q19 and 1H19 core profit grew 3% and 4% to RM49.0m and RM90.2m, respectively, from last year mainly driven by higher sales volume by 4% and 3% over the year. On the other hand, revenues leapt at a higher percentage of 16% and 17% in 2Q19 and 1H19, respectively, primarily due to higher gas selling price which was well expected given the half-yearly scheduled hike in gas selling price. 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, 2Q19 and 1H19’s CapCon were fairly flattish at RM0.9m and RM1.7m, respectively, while Tolling fees fell 22%/21% to RM2.9m/RM5.8m from RM3.8m/RM7.4m in 2Q18/1H18 as it normalised.

RP2 margin spread is the key for future earnings. GASMSIA is in the final year of RP1 before the new RP2 is implemented next January. Given the case of TENAGA (MP; TP: RM13.30,) which saw its rate of return on RAB fell to 7.3% in RP2 from 7.5% in RP1, fears of GASMSIA facing the same fate have been depressing the stock. However, management believes it should be awarded a higher rate of return given higher risk of demand. In any case, a 0.2% reduction will not have a material impact to earnings, amounting to RM3.8m based on RM1.9b RAB in FY19. As such, volume growth is vital to its bottomline as a 0.2% reduction unlikely to have a big impact on its margin spread of RM1.80-2.00/mmbtu which it had maintained near to RM2.00/mmbtu in the past two financial years. While keeping our forecast, we raised our NDPS by 20% as we upped our payout ratio to 90% from 75%.

Keep MARKET PERFORM. Although there is uncertainty over the margin spread in the new RP2, we remain optimistic on its steady volume growth while there is a new source of income arising from retail margin under the TPA structure. We believe the market should have priced in the uncertainty as its share price has been hovering at the current level for the past one year despite improving results. Thus, we maintain our MARKET PERFORM call, which is supported by decent dividend yield of 4-5%. However, target price is reduced slightly to RM3.00/DCF share from RM3.05/DCF share as we roll over valuation base-year to FY20 from FY19. Upside risk to our call is sales volume continuing to be stronger than expected.

Source: Kenanga Research - 20 Aug 2019