We expect GASMSIA’s 4QFY23 net profit to inch up 3% sequentially backed by a higher sales volume coupled with better gas selling prices, in line with our expectation. Hence, we keep our forecasts, TP of RM3.33 and MARKET PERFORM call. The stock is supported by an above average dividend yield of >6%.

We expect GASMSIA’s 4QFY23 net profit to come in at about RM88m (+3% QoQ), bringing cumulative FY23F net profit to about RM367m which will be in line with our forecast.

We expect better sales volume sequentially by c.4% in 4QFY23 given the improved business condition especially the glove sector which declining sales trend had already bottomed in 2QFY23 (see chart in Page 2) and reported first quarterly sales volume growth in 3QFY23 by 4% QoQ to 7.5m GJ after six quarters of declining sales trend while the glove makers also reported improved results in their latest quarterly results.

To recap, sales volume in the glove sector always made up >30% of GASMSIA’s total sales volume (33% in FY19) in pre-COVID period and it hit record high of 38% in FY20. However, due to oversupply coupled with sharp decline in demand post pandemic, glove sector only made up to 20% of the group’s sales volume in 3QFY23. The sharp decline was partly due to: (i) it losing one of its glove makers to its competitor after the gas market liberalisation in 2022, and (ii) lower demand after the glove makers lost their market share to international peers, especially the Chinese makers which expanded capacity during the pandemic period.

On the other hand, 4QFY23 gas selling price is also likely to improve further given the DOSM LNG price which rose 5% QoQ to RM43.96/mmbtu in 4QFY23 from RM41.87/mmbtu in the preceding quarter (see chart in Pg 2). The gas selling price is based on Malaysia Reference Price (MRP) plus beta while MRP is the weighted-average price of LNG free-on-board exported from Malaysia as declared by DOSM. As such, the higher DOSM LNG should help to increase retail margin which is pegged to a percentage of gas selling price.

Forecasts. Maintained with FY23-24F margin assumption of RM2.80- RM2.50/mmbtu.

Valuations. We maintain our DCF-derived TP of RM3.33 which is based on 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 5).

Investment case. 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 - 6 Feb 2024