GASMSIA’s record FY22 results met expectations, fuelled by bumper retail margins on high gas prices (retail margins are pegged to a percentage of gas prices), despite lower offtake from glove makers. However, gas prices, and thus retail margins have since peaked. Nonetheless, the natural gas distributor still has room to raise its absolute dividend payout, translating to a dividend yield of >5%. We maintain our FY23F net profit, TP of RM3.54 and MARKET PERFORM call.

FY22 core net profit of RM393.2m met expectations. It declared a 2nd

interim NDPS of 9.24 sen (ex-date: 03 Mar; payment date: 31 Mar), totalling FY22 NDPS to 15.14 sen against the 17.67 sen paid in FY21 and our FY22 assumption of 27.1 sen. However, we believe it will declare a final dividend subsequently as historically it usually pays a separate final NDPS following 4Q results announcement.

YoY, FY22 core profit surged 56% to RM393.2m on the back of a 31% jump in revenue owing to higher gas selling price as Malaysia Reference Price (MRP) surged 65% to c.RM40/mmbtu on average in FY22 from c.RM24/mmbtu in FY21. Given the strong ASP, earnings mix between shipper and distribution has improved to 55:45 in FY22 from 40:60 previously. This is also attributed to higher operating margin of 7.1% from 5.7% previously. To refresh, shipper earnings derived from retail margin is based on gas selling price.

QoQ, although sales volume fell to 46m GJ from 47m GJ in 3QFY22, 4QFY22 revenue grew 19% to RM2.22b on higher gas selling price as MRP soared to c.RM50/mmbtu from c.RM40/mmbtu. However, core net profit only grew 5% to RM99.5m due to higher taxation (+12% or RM5.1m) and lower JV incomes (-47% or RM0.7m).

The key takeaways from the results briefing are as follows:

1. The company expect gas selling prices in 1QFY23 to be flattish QoQ, and to peak in 2QFY23 given the trend reversal in gas prices in recent months. Recall, GASMSIA charges customer based on MRP + beta (operating cost + retail margin).

2. Sales volume fell 8% YoY to 200m GJ in FY22 from 217m GJ in FY21, dragged down by lower demand from the glove sector (- 29% YoY). Glove makers contributed 27% of total sales volume in 4QFY22, down from 33% in 4QFY21. GASMSIA acknowledged that its prospects are still significantly tied to the glove sector (which outlook, we believe, is unlikely to improve over the next 12 months due to massive industry over-capacity).

3. Despite a 29% YoY decline in sales volume to glove makers in FY22, GASMSIA chose not to exercise the “take-or-pay” clause on them, emulating the stance of its supplier Petronas. Going forward as long as Petronas refrain from invoking the clause, GASMSIA is unlikely to do so.

4. Despite the softer earnings outlook (due to declining gas selling prices), GASMSIA still has room to raise its absolute dividend payout, given the significant expansion in its earnings base in recent years.

We maintain our FY23F earnings (based on a margin assumption of RM2.70/mmbtu) and introduce our FY24F numbers (based on a margin assumption of RM2.50/mmbtu). We project FY23F and 24F dividends of 19.0 sen (payout ratio of 70%) and 20.2 sen (payout ratio of 80%), respectively.

We like GASMSIA for: (i) its strong market position, being a key natural gas retailer in Malaysia, (ii) its strong earnings visibility underpinned by its ability to retain its customers, typically, via a 3-year contract, and (iii) its strong free cash flows generation anchoring a dividend yield of >5%. However, there is a lack of catalyst given that its earnings have already peaked in FY22 with gas prices abating.

We maintain our DCF-derived TP of RM3.54 (WACC: 6.5%; TG: 2%). There is no adjustment to our TP based on ESG given a 3- star rating as appraised by use (see Page 4).

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

Source: Kenanga Research - 20 Feb 2023