GASMSIA’s 1HFY23 results met expectations. We expect softer quarters ahead as gas prices normalise. Nonetheless, its earnings visibility remains strong having locked in most of its customers in 3-year contracts. We maintain our earnings forecasts but lower our TP by 8% to RM3.27 (from RM3.54). Maintain MARKET PERFORM for its attractive dividend yield of >6%.

1HQFY23 core profit of RM192.7m made up 55% and 54% of our full year forecast and the full-year consensus estimates, respectively. However, we consider the results within expectations as we expect a weaker 2HFY23 on lower gas prices. It declared a first interim NDPS of 5.72 sen in 2QFY23, (ex-date: 12 Oct; payment date: 27 Oct) as opposed to 5.9 sen paid in 2QFY22.

YoY, despite gas volume sliding 17% to 72.7m GJ, 1HFY23 revenue leapt 25% to RM4.46b on the back of higher gas selling price. The Malaysia Reference Price (MRP) surged 53% to c.RM53.2/mmbtu in 1HFY23. Meanwhile. 1HFY23 core profit dropped 3% largely attributable to lower gas volume as mentioned above.

QoQ, 2QFY23 revenue contracted 17% due to lower gas sales volume (-3%) and lower gas selling price (MRP -17% to RM48.15/mmbtu). However, 2QFY23 core profit rose 3% due to adjustment on a lower internal gas consumption (IGC) cost which reduced to 0.3% (based on gas cost) from 0.6% previously.

The key takeaways from the results briefing are as follows:

1. During 1HFY23, GASMSIA had a net addition of six industrial accounts (16 new accounts, partially offset by the non-renewal of 10 existing accounts). Two customers asked for increased supply. Nonetheless, 1HFY23 sales volume fell 17% to 72.7m GJ from 87.2m GJ previously as mentioned.

2. Glove manufacturers made up 21% of gas volume sold (72.7m GJ) in 1HFY23 as compared to 23% in 2HFY22 and 30% in 1HFY22, respectively. We estimated that gas demand for the glove segment fell 12% QoQ to 7.1m GJ in 2QFY23 from 8.1m GJ.

3. GASMSIA believes the demand from glove manufacturers has hit rock bottom as the Jul 2023 number was flattish vs. that of Jun 2023.

Forecasts. Maintained based on unchanged margin assumptions of RM2.70/mmbtu and RM2.50/mmbtu in FY23 and FY24, respectively.

However, we trim our DCF-derived TP by 8% to RM3.27 (from RM3.54) as we now discount back its cash flows from FY24 onwards (vs. from FY23 previously). The average gas price during the new period is slightly lower than previously (due to the exceptionally high gas price in FY23). We keep WACC of 6.5% and TG of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by use (see Page 4).

We like GASMSIA for its: (i) strong market position, being a key natural gas retailer in Malaysia, (ii) strong earnings visibility underpinned by its ability to retain customers, typically, via 3-year contract, and (iii) strong free cash flows generation anchoring a dividend yield of >6%. However, there is a lack of catalyst given that its earnings have already peaked in FY22 with gas prices easing.

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 - 22 Aug 2023