3QFY19 results missed expectation slightly due to one-off loan hedging cost but it raked in another record sales volume again at 51.4m mmbtu (+5% QoQ). Going forth, volume growth remains its key earnings driver while we believe impact from the cut in rate of return, if any, could be minimal given its relatively small RAB of RM1.9b. We also believe that market should have priced in the negatives. Thus, MP with TP of RM3.00 maintained for its 4%-5% yield.

9MFY19 results missed forecasts slightly. At 72%/70% of house/street’s FY19 estimates, 9MFY19 core profit of RM132.2m fell short of estimates slightly owing to the losses incurred in both 2QFY19 and 3QFY19 from 66%-owned JV company Gas Malaysia Energy Advance Sdn Bhd (GMEA) which was due to loan hedging cost. There was no dividend declared during the quarter as it pays half-yearly dividend.

GMEA’s losses dampened earnings. 3QFY19 core profit plummeted by 14% QoQ to RM42.0m despite revenue inching up slightly by 1%. The decline in earnings was largely due to higher opex including interest expenses as well as the said GMEA’s losses on loan hedging costs which saw the share of JV income losses widened to RM2.7m from RM0.6m in 2QFY19. We have learnt that prior to the hedging adjustment, in fact, GMEA recorded RM5m profit. The loan hedging cost in 2QFY19 and 3QFY19 are one-offs and will not reoccur in the future. Operationally, core gas business reported yet another record sales volume of 51.4m mmbtu which was 5% higher than 49.3m mmbtu in 2QFY19. In addition, the improved revenue also partly due to higher actual average selling price by 5% to RM34.66/mmbtu in 2HCY19 from RM32.92/mmbtu in 1HCY19.

Higher volume led YoY earnings growth. YoY, 3QFY19 core profit rose slightly by 1% from RM41.4m despite revenue surging 13%. The disproportionate earnings growth was due to higher depreciation charges by 11%, interest income by 51% and the said loan hedging cost. The big jump in revenue, beside a 7% hike in sales volume, was largely due to higher average selling price by 6% from RM32.69/mmbtu in 2HCY18. YTD, 9MFY19 core income grew 3% to RM132.2m from RM128.3m in 9MFY18 while revenue leapt 16% to RM5.21b in 9MFY19. Earnings were capped by higher depreciation charge by 9%, interest expense by 16% while JV income turned to losses of RM1.5m, due to the said loan hedging cost, from share of profit of RM4.1m. Beside higher sales volume of 4% to 148.8m mmbtu, higher actual average selling price also attributed to higher revenue in 9MFY19.

RP2 margin spread is the key for future earnings. GASMSIA is in the final year of RP1 before the new RP2 is implemented next Jan. Given the case of TENAGA (MP; TP: RM13.40,) 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 any 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 is unlikely to exert 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.

Keep MARKET PERFORM. Post-results, we trimmed FY19 forecast by 2% mainly on GMEA losses and higher interest assumption but keep FY20 estimates unchanged. 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 with unchanged target price of RM3.00/DCF share, which is supported by decent dividend yield of 4- 5%. Upside risk to our call is sales volume continuing to be stronger than expected.

Source: Kenanga Research - 15 Nov 2019