1HFY22 results beat expectations as strong gas prices lifted retail margins. We expect 2HFY22 earnings to remain strong given the sustained high margins, albeit partially mitigated by a slowdown in volume (we believe due to lower production by glove makers that typically contribute a third to its business). Looking into FY23, we expect earnings to ease as gas prices normalise. We raise our FY22F net profit forecast by 15%, tweak our DCF derived TP up slightly to RM3.43 (WACC: 6.5%; TG: 2%) from RM3.40.

Beat expectations. 1HFY22 net profit beat expectations at 65% and 64% of our and consensus full-year forecasts, respectively. The key variance against our forecast came largely from stronger-than expected gas prices that lifted retail margins (which are a function of percentage based on gas cost). It declared a first interim NDPS of 5.9 sen in 2QFY22 compared to 4.8 sen in 2QFY21.

Higher gas price fuelled earnings jump. 1HFY22 net profit jumped 68% YoY to RM198.7m from RM118.0m, as 2QFY22 hit another record quarter net profit of RM107.3m from RM91.3m in 1QFY22, thanks largely to continued rising gas prices. Based on Petronas’ latest Malaysia Preference Price (MRP), price for Mar 2022 to May 2022 was RM40.174/mmbtu against RM35.254/mmbtu in Dec 2021 to Feb 2022 while GASMSIA charges its customer based on MRP + beta. Given the strong gas price, though sales volume fell 4% QoQ, earnings were still 18% higher.

We raise our FY22 earnings by 15%, after increasing our margin spread assumption to RM2.90/mmbtu from RM2.60/mmbtu, assuming gas prices stay elevated in 2HFY22. This should offset a slowdown in volume as guided by the company (we believe, on the back of lower production by glove makers that typically contribute a third of its business). We keep our FY23 margin spread assumption of RM2.40/mmbtu as we expect gas prices to normalise. Accordingly, FY22 NDPS forecast is also upgraded proportionally based on unchanged earnings payout of 90%.

Expect FY23 earnings to normalise but still well above FY21. While the market liberalisation which started in Jan this year had put off buying interest previously, we see the new tariff setting strategy addressing earnings risk - at least the 1HFY22 results showed that it worked. The company guided for stronger gas prices in 2HFY22 than the already solid gas price in 1HFY22. However, the company believes gas price should normalise in FY23.

Keep OUTPERFORM. We remain optimistic on GASMSIA’s earnings prospects given the expected resilient earnings for the next three years supported by favourable retail margins arising from the better deal in contract renegotiation. With economic reopening, we believe volume growth is back on track of which we projected at 3% annually. As such, we reiterate our OUTPERFORM rating for its earnings defensiveness and above average dividend yield of >7%. Post earnings revision, our new DCF-driven TP is raised slightly to RM3.43 from RM3.40 previously. There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us (see Page 4).

Risks to our recommendation: (i) volatility in margin spread; and (ii) economic slowdown hurting demand for gas.

Source: Kenanga Research - 19 Aug 2022