While 4QFY21 results were on track, GASMSIA ended FY21 with record earning, thanks largely to higher gas volume while margin spread stayed healthy. Going forth, volume growth remains the key to earnings prospects while management expects FY22 margin spread to hold at FY21 levels despite market liberalisation. In all, we still like the stock for its earnings resiliency and attractive yield supported by a regulated framework. OP with Target Price at RM3.00.

FY21 in line. At 104%/106% of house/street’s forecast, FY21 core profit of RM251.4m met our expectation but beat consensus estimate slightly. It declared a 2nd interim NDPS of 6.0 sen (ex-date: 02 Mar; payment date: 31 Mar), totalling FY21 NDPS to 10.8 sen against the 15.05 sen paid in FY20. However, 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 FY21 net profit and 90% payout, it could pay 17.5 sen in total for FY21 which would be higher than our estimate of 16.9 sen.

4QFY21 boosted by volume recovery. 4QFY21 core profit leapt 15% QoQ to RM71.5m as revenue jumped 40%, thanks to the recovery of sales volume by 14% to 53.9m mmbtu from 47.3m mmbtu as the preceding quarter was affected by MCO 3.0 lockdown. 4QFY21 margin spread was comparable to 3QFY21 with improved retail margin, attributable to higher gas selling price. As such, the higher gas selling price by 21% to RM36.42/mmbtu from RM30.03/mmbtu coupled with higher sales volume was the contributing factor of a 40% surge in revenue.

Overall a better year in FY21. YoY, 4QFY21 core profit fell 6% from RM76.2m despite revenue rising 7%. This was largely due to higher revenue cap recognised last year as it was only adjusted in 4QFY20 in FY20 whereas the lag in revenue cap was removed and adjusted quarterly instead in FY21. Meanwhile, the increase in revenue was largely driven by an 8% rise in gas selling price which was offset by a 2% decline in gas volume. On the other hand, interest cost fell to RM2.4m from RM5.0m largely due to lower OPR. YTD, FY21 core profit rose 13% to RM251.4m from RM223.1m owing to higher gas volume by 1% and improved margin spread. However, FY21 revenue fell 12% largely due to lower gas selling price of c.RM28.86/mmbtu vs. RM33.65/mmbtu previously.

Volume growth to lead earnings higher. With sales volume back to pre-COVID-19 level since 4QFY20 and any short-fall of demand adjusted under revenue cap quarterly, GASMSIA’s earnings are fairly resilient. As such, it will be a volume play of which we projected a 3% growth. On the other hand, the consistent strong margin spread in the past three quarters, and coupled with management’s guidance it will continue in FY22, we raised FY22 total margin spread assumption to RM2.30 /mmbtu which leads to 5% upgrade in FY22 earnings forecast. We also launched FY23 forecasts with EPS to grow 7% based on RM2.30/mmbtu margin spread and 3% volume growth. Our NDPS assumption is based on the unchanged 90% payout ratio.

OUTPERFORM maintained. While we upped margin spread assumption, we tag a higher risk premium with WACC of 6.7% from 6.2% to our DCF valuation as the market liberalisation which was supposed to start in Jan22 may normalise the margin spread in the longer term. As such, our DCF-driven TP is maintained at RM3.00 post adjustment. Nonetheless, we still like the stock for its earnings certainty which backs its above average dividend yield of >6%. As such, we continue to rate GASMSIA an OP.

Risk to our call is lower–than-expected margin spread in the future.

Source: Kenanga Research - 17 Feb 2022