We are turning neutral on GASMSIA following its strong share price performance of late, while a key re-rating catalyst, i.e., soaring global gas prices boosting the retail margins of its non regulated business, appear to have run its course. Not helping either is the softening demand from glove makers that typically contribute to a third of its business. Maintain our forecasts and DCF-derived TP of RM3.43 (WACC: 6.5%; TG: 2%) but cut our recommendation to MARKET PERFORM from OUTPERFORM.

We are turning neutral on GASMSIA following its strong share price performance of late. On the other hand, its key re-rating catalyst, i.e., soaring gas prices globally, have come off their peak significantly, which means the expanding margins of GASMSIA’s non-regulated business have run their course.

We see plenty of signs pointing towards GASMSIA’s peaking share price including:

1. Signs of trend reversal in gas prices. GASMSIA charges its customers in accordance with Malaysia Reference Price (MRP) + beta (i.e., operating costs plus profit margin). While the latest MRP for Mar to May 2022 period was 14% higher at RM40.174/mmbtu against RM35.254/mmbtu in Dec 2021 to Feb 2022, we expect the next MRP to come in lower, taking our cue from LNG Japan/Korea Marker (Platts) Swap futures, where prices have already come off about 40% from its all-time-high of USD69.955/mmbtu on 25 Aug 2022 to USD42.16/mmbtu on 16 Sep 2022 (see chart on Pg 2).

2. Retail margins to taper off. Amidst falling gas prices, GASMSIA’s retail margins (from non-regulated business) will fall as the margins are a function (i.e., 1%-2%) of gas cost. We estimate that the non regulated business contributed 50% of group earnings in 1HFY22 amidst abnormally high gas prices vs. only 25% under a more stable gas price environment in the past.

3. Demand softening in 2HFY22. While GASMSIA no longer share gas volume data since 1QFY22 for competitive reasons under the more liberalized market environment, the company has guided for a slowdown in volume which we believe could be attributable to lower production by glove makers that typically contribute to a third of GASMASIA’s business volume.

Forecasts. No changes in FY22F/FY23F earnings forecast which is based on 3% demand growth with total margin spread of RM2.90/mmbtu and RM2.40/mmbtu, respectively.

Downgrade to MARKET PERFORM from OUTPERFORM as we believe its earnings are peaking in FY22 as gas prices ease. Nonetheless, GASMSIA’s long-term earnings remain defensive backed by its regulated business which will anchor its dividend yield of >6%. Our DCF-driven TP is maintained at RM3.43 (WACC: 6.5%; TG: 2%). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risks to our recommendation: (i) regulatory risk, (ii) volatility in margin spread of non-regulated business, and (ii) economic slowdown hurting demand for gas.

Source: Kenanga Research - 20 Sept 2022