Following a results briefing, we understand that the impact from the MCO-led lockdown is less severe than expected. The volume in Jan-Apr declined by single-digit YoY but is picking up in May as businesses are gradually restarting. Sector of the hour and its biggest off-takers, glove makers, posted a strong c9% off-take growth in 1QFY20. With gloves highly in demand in this pandemic period, this should mitigate downside risk. Keeping MP with revised TP of RM2.80.

Volume declined single-digit YoY in Jan-Apr. For the first time, GASMSIA reported sales volume which included NGV beside only gas volume previously. The 1QFY20 total sales volume was marginally higher by 0.9% YoY to 49.8m mmbtu from 49.4m mmbtu in 1QFY19. This is in spite of a 2-week impact from Movement Control Order (MCO), which started from 18 Mar. The marginal improvement was largely attributable to the strong offtake from glove makers with volume rising c.9% or c.1.4m mmbtu. Management was unable to guide the lockdown impact while waiting a full quarter of 2QFY20 to end next month for better clarity. So far, total volume declined single-digit YoY in Jan-Apr but picked up in May as we moved into Conditional Movement Control Order (CMCO).

Lower operating costs boosted earnings. In 1QFY20, regulated distribution business made up 6% of revenue but 80% of net profit while shipper accounted for 94% of group’s revenue and 20% of bottom-line. To recap, 1QFY20 net profit jumped 16% YoY to RM47.9m from RM41.2m. Management revealed that the improvement was largely driven by lower operating costs which led to gross profit jumping 25% to RM83.9m from RM67.3m. This includes RM4m cost control and the balance RM12-13m partly from higher volume growth and the maiden retail margin. There is still no disclosure of retail margin from the company. Going forward, it aims to cut 9-10% operating costs to cushion declining volume offtake in this depressed business environment.

Cut FY20E earnings by 12%. We reckon that the COVID-19-led lockdown will lead to a slowdown in economy and will impact demand growth. However, we believe the impact could be minimal as some of its key off-takers like glove makers are operating full-stream during this period should help to partially cushion any downtick in demand. As such, we cut our FY20E demand growth assumption to -5% to 191.1m mmbtu from +3% at 207.2m mmbtu but keep FY21E volume assumption of 213.5m mmbtu. Thus, we cut FY20E CNP by 12% while FY21E CNP is reduced by 2% on cashflow related fine-tuning. Correspondingly, NDPS is also lowered proportionally based on unchanged dividend payout of 90%. Our sensitivity study shows that every 1% drop in demand growth would lead to 1.5% decline in earnings and vice versa.

Maintain MARKET PERFORM. Although we are cautious on near-term impact from MCO-led slowdown, we remain positive on its long-term earnings prospects given the RM1.80-2.00/mmbtu margin spread that will sustain its earnings growth on the back of volume growth. As we are comfortable with earnings certainty post-result briefing, we decided to switch back to DCF valuation from PBV with new target price of RM2.80/DCF share from RM2.50 which was based on -1SD 5-year PBV of 3.10x. Our new target price which reflects latest risk profile, is close to its 5-year PBV mean of 3.37x at RM2.75. We maintain our MARKET PERFORM rating for its 4-5% yield. Downside risk to our recommendation is a prolonged slowdown in economy which could lead to drop in demand growth.

Source: Kenanga Research - 18 May 2020