We raised our DCF-driven target price to RM3.40 from RM3.10 on the back of 15%-23% upgrade in FY22-FY23 net profit forecasts on higher total margin spread assumption of RM2.60/mmbtu from RM2.50/mmbtu-RM2.40/mmbtu. We believe our previous assumptions were conservative as the strong 1QFY22 margin is to set a new base for the next three years. OUTPERFORM maintained.

The key takeaways from our recent engagement with the company are as follows:

1. While the company did not disclose the decline in shipper volume from Gas Malaysia Energy & Services Sdn Bhd (GMES) in 1QFY22 following market liberalisation, which started from Jan 2022, due to information sensitivity, it confirmed that Gas Malaysia Distribution Sdn Bhd (GMD) continued to register volume growth as all shippers have to pay for the usage of GMD’s distribution pipeline.
2. 1QFY22 margin spread is to stay for at least three years which is the shortest contract tenure while the rest are 5-year and 8- year contracts. Given the strong margin, we believe the retail margin could be as high as 1.5%-2.0% against the earlier indication of 1%. This is more than sufficient to address the decline in volume, which we estimated at 5% QoQ in 1QFY22, and even lead to better results.
3. While the company didn’t share the RAB return rate which is slightly higher than TENAGA’s (OP; TP: RM10.81) 7.3% in RP3, it believes the rate of return in RP2 should be able to maintain at current RP1’s level when it ends this December.

Upgrade FY22-FY23 earnings by 15%-23%. As witnessed in 1QFY22, the market liberalisation may not be a bad thing for GASMSIA as it managed to improve its profitability given the tariff setting strategy to boost retail margin. In addition, as gas prices remain elevated, retail margin which is based on gas selling price will remain high. As the shortest contract tenure is three years, this means the current strong margin spread will at least stay firm for the next three years. As such, we upped our total margin spread assumption to RM2.60/mmbtu for FY22-FY24 but a lower spread of RM2.40/mmbtu thereafter. This led us to upgrade FY22-FY23 earnings forecast by 15%-23%. NDPS is also raised proportionally based on unchanged earnings payout of 90%.

Maintain OUTPERFORM. We remain optimistic about GASMSIA’s earnings prospects given the expected strong earnings for the next three years supported by favourable retail margin arising from the better deal in contract renegotiation. With economic reopening, volume growth is back on track which we projected at 3% annually. As such, we maintain our OUTPERFORM rating for its earnings defensiveness and above average dividend yield of >7%. Post-earnings revision, our new DCF-driven target price is now RM3.40, from RM3.10 previously.

Downside risk to our recommendation is lower-than-expected margin spread in the future as well as losing clients to other shippers.

Source: Kenanga Research - 6 Jul 2022