While 4QFY19 core profit dipped slightly by 2% sequentially largely due to GCPT adjustment, FY19 core earnings grew 2% to RM173.3m which matched expectations. It also raked in yet another record sales volume at 52.4m mmbtu (+1% QoQ) in 4QFY19. Going forth, volume growth remains the key earnings driver with margin spread maintained at RM1.80-2.00/mmbtu. We keep our OUTPERFORM rating and RM3.00 target price for its 4%-5% yield.

FY19 results in line. At 96% of house/street’s FY19 estimates, FY19 core profit of RM173.3m came within expectations. The headline net profit of RM190.1m included a total of c.RM27m one-off gains (RM21m for reinvestment tax allowance and RM5.5m LAD) posted at share of profit at JV for its 66%-owned Gas Malaysia Energy Advance Sdn Bhd (GMEA). It declared 2nd interim NDP of 4.8 sen (ex-date: 12 Mar; payment date: 31 Mar) in 4QFY19, totalling FY19 NDPS to 9.6 sen against a total of 13.5 sen paid in FY18. We believe it will declare a final NDPS subsequently as historically it usually pays a separate final NDPS following 4Q results announcement. Based on its headline FY19 net profit, we believe it could pay c.14.0 sen in total for FY19 which would be higher than our estimates of 12.6 sen.

Sequential results dipped slightly on GCPT adjustment. Despite sales volume rising to another record high of 52.4m mmbtu from 51.7m mmbtu, 4QFY19 revenue fell 4% QoQ to RM1.68b due solely to RM143m in reversed adjustment on Gas Cost Pass Through (GCPT) and thus resulting in lower earnings. Meanwhile, share of JV income surged to RM22.7m, due to abovementioned one-off gains, from loss of RM2.7m which was due to loan hedging cost for GMEA as well. In all, after adjusting for one-off gains and GCPT, 4QFY19 core profit fell slightly by 2% to RM41.1m from RM42.0m.

Higher volume-led FY19 earnings growth. YoY, 4QFY19 core profit fell slightly by 1% from RM41.4m on the back of 3% hike in revenue. This is in spite of sales volume being 2% higher than 51.2m mmbtu posted in 4QFY18 as the abovementioned GCPT adjustment crimped profitability. YTD, FY19 core profit rose 2% to RM173.3m from RM169.7m in FY18 with revenue jumping 10% to RM6.89b. This was mainly driven by higher sales volume by 4% to 201.2m mmbtu as profit spread was maintained at c.RM2.00/mmbtu level. The higher revenue was largely due to higher average selling prices in FY19 (RM32.69/mmbtu in 1HFY19 and RM32.74/mmbtu in 2HFY19) vs. FY18 (RM30.9/mmbtu in 1HFY18 and RM30.9/mmbtu in 2HFY18).

RP1 margin spread to remain the same ensuring earnings certainty. Effectively from the newly announced RP1, GASMSIA will be an investment holding company with earnings derived from shipper and distribution systems with a combined margin spread maintained at RM1.80-2.00/mmbtu. As such, volume plays an important role to earnings growth while the shipper charges to 3rd party shipper for using GASMSIA’s distribution systems should add extra income to the group. For now, we keep our FY20 estimates unchanged while introducing new FY21 forecast with volume growth and spread margin maintained at 3% and RM2.00/mmbtu, respectively.

Keep OUTPERFORM. We remain positive on its earnings prospects given the RM1.80-2.00/mmbtu margin spread that will keep its earnings growing on the back of volume growth. In addition, there is uptick in earnings from additional shipper charges when 3rd party shipper utilises its distribution network. As such, we continue to rate the stock an OUTPERFORM with unchanged target price of RM3.00/DCF share. Our recommendation is also supported by a 4-5% yield. Risk to our call is lower-than-expected RAB rate of return and sharp fall in demand growth.

Source: Kenanga Research - 14 Feb 2020