1HFY20 net profit of RM92.5m beat our forecast on higher margin spread owing to a new retail margin. We previously were of the view that it was unlikely to get a separate retail margin without compromising the existing RM1.80- RM2.00/mmbtu margin spread. Nonetheless, despite higher margin spread and fully resumed business activities, we believe most if not all near-term catalysts are already priced in. Thus, MP is maintained but with an upgraded TP of RM2.85/DCF share.

1HFY20 results beat house’s expectation. At 56% of our FY20 estimates, 1HFY20 net profit of RM92.5m came above our expectation as its margin spread was above RM2.00/mmbtu owing to retail margin which we previously assumed was part of its RM1.80-2.00/mmbtu margin spread. The retail margin is c.1% of gas selling price. Against market consensus, the 1HFY20 results are in line which accounted for 51% of street’s FY20 estimate. Meanwhile, it declared 1st interim NDPS of 4.25 sen (ex-date: 21 Sep; payment date: 08 Oct) in 1HFY20 which is lower than the 4.80 sen paid in 1HFY19.

Weaker sequential earnings on MCO-led slowdown... 2QFY20 net profit fell 7% QoQ to RM44.6m from RM47.9m in 1QFY20 as revenue dipped 4% to RM1.54b from RM1.61b in the preceding quarter. This was not unexpected given the virus-led lockdown which saw its gas sales volume falling 4% QoQ to 46.2m mmbtu from 48.4m mmbtu. Total sales volume which includes NGV and LPG in 2QFY20 also fell 4% QoQ to 47.6m mmbtu against 49.8m mmbtu in 1QFY20. Meanwhile, share of loss for JV was maintained at RM0.2m.

…but margin improved with the inclusion of retail margin. YoY, 2QFY20 net profit contracted 9% from RM49.0m as revenue declined 11% from RM1.74b owing to a 6% contraction in gas sales volume on MCO-driven slowdown. However, its EBTDA margin improved to 5.4% from RM5.1% on the higher margin spread. Similarly, improved margin spread led 1HFY20 net profit grew slightly by 3% to RM92.5m from RM90.2m despite revenue declining 9% on the back of 3% contraction in gas sale volume of 94.7m mmbtu.

Business should pick up from 2HFY20 onwards. With businesses reopened, the company indicated that its customers have fully resumed operations since the announcement of RMCO in early June. As such, GASMSIA should see business volume growth resumption from 3QFY20. For now, we keep our demand growth assumption of - 5%/+11.7% for FY20/FY21 but raise margin spread to RM2.10/mmbtu for both years from RM2.00/mmbtu as we now assume the normal margin spread to come at the lower range of RM1.80-2.00/mmbtu plus the RM0.30/mmbtu retail margin. As such, we upgrade FY20/FY21 CNP estimates by 9% each. Correspondingly, NDPS is also raised proportionally based on unchanged 90% earnings pay-out ratio.

Catalysts priced in, maintain MARKET PERFORM. While we remain positive on its long-term earnings prospects given the margin spread of above RM2.00/mmbtu with the inclusion of retail margin that will keep its earnings growing on the back of volume growth, we maintain our MARKET PERFORM rating on the view that most if not all catalysts have been priced in. However, our target price is upped to RM2.85 from RM2.80 based on DCF valuation after imputing higher margin spread. Our recommendation is supported by 4%-5% dividend yield. Upside risk to our call is a higher-than-expected volume growth.

Source: Kenanga Research - 14 Aug 2020