GASMSIA’s 1QFY23 results met expectations. We expect a  sequential decline in earnings in coming quarters as gas prices  normalise. However, its earnings visibility remains strong as  most of its customers are locked in 3-year contracts. We maintain  our earnings forecast, TP of RM3.54 and MARKET PERFORM  rating. Its dividend yield is attractive at c.6%.

1QFY23 results in line. 1QFY23 core profit of RM95.0m accounted  for 27%/26% of our/street’s FY23 estimate. We consider the results to  be within expectation as we expect sequential quarterly decline in earnings given the downtrend in gas prices. Expectedly, no dividend  was declared as it usually pays half-yearly dividend.

YoY, 1QFY23 core profit rose by 4% to RM95.0m from RM91.3m in  1QFY22, on the back of 37% jump in revenue attributable to higher  gas selling price of Malaysia Reference Price (MRP) which surged  71% to c.RM58/mmbtu from c.RM34/mmbtu last year, despite gas  sales volume which declined 17% to 37m GJ. Given the strong ASP,  earnings mix between shipper and distribution has improved further to  60:40 from 55:45. To refresh, shipper earnings are derived from retail  margin which is based on gas selling price. However, higher repair and  maintenance costs capped its earnings and dragged operating margin  lower to 5.0% from 6.7%.

QoQ, despite its sales volume falling slightly by 3% to 37m GJ,  1QFY23 revenue rose 10% to RM2.44b on higher gas selling price as MRP grew further to new high of c.RM58/mmbtu from c.RM50/mmbtu.  However, core profit fell 5% to RM95.0m from RM99.5m due to higher  repair and maintenance costs as mentioned above.

The key takeaways from the results briefing are as follows:

1. It guided for higher gas selling prices during the first three  quarters of FY23 from a year ago, but lower in 4QFY23 (vs.  c.RM50/mmbtu recorded in 4QFY22). Gas selling prices hit a  record c.RM58/mmbtu in 1QFY23 but it expects them to ease to  c.RM48/mmbtu in 2QFY23. Recall, GASMSIA charges customer  based on MRP + beta (operating cost + retail margin).

2. Sales volume fell 3% QoQ / 17% YoY to 37m GJ in 1QFY23,  dragged down by lower demand from the glove sector. In  4QFY21, glove makers contributed 33% of total sales volume. It  declined to 28% in 3QFY22, 27% in 4QFY22 and 22% in  1QFY23. GASMSIA did not share sector data for 1QFY22 and  2QFY22.

3. High repair and maintenance costs during the past three quarters  were due to emergency repair work as opposed to less repair and maintenance works in 1HFY22 as it was unable to source certain parts during the pandemic. However, the costs in FY23 will be similar to that of FY22.

We maintain our FY23 and FY24 earnings forecasts based on margin  assumptions of RM2.70/mmbtu and RM2.50/mmbtu, 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 customers, typically, via 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 - 19 May 2023