GASMSIA’s 1QFY24 results beat our forecast (due to a higher sales volume and a better gas reference price) but only met market expectations. Its 1QFY24 core net profit rose 8% YoY driven largely by a higher sales volume. We raise our FY24-25F net profit forecasts by 9% and 12%, respectively, lift our TP by 7% to RM3.55 (from RM3.33) but maintain our MARKET PERFORM call. The stock offers an attractive dividend yield of >6%.

GASMSIA’s 1QFY24 core profit of RM102.3m topped our forecast at 31% of our full-year forecast but only met market consensus at 28% of the full-year consensus estimate. The key variance against our forecast came from higher-than-expected sales volume and a better Malaysia Reference Price (MRP). MRP was at RM41.51/mmbtu in 1QFY24 and is set at RM44.12/mmbtu in 2QFY24, vs. our FY24F assumption of RM40.0/mmbtu. No dividend was declared during the quarter as expected as it usually pays half-yearly dividends.

YoY. Its revenue declined 23% due to a 29% contraction in MRP, partially mitigated by a 4% rise in its sales volume. However, its core profit rose 8%, we believe, due to gain in operating scale on a higher sales volume.

QoQ. Its 1QFY24 revenue rose by 4% on a 5% rise in MRP, partially eroded by a 1% decline in its sales volume. Its core profit fell slightly by 2% due to higher depreciation, and we believe, loss of operating scale on a lower sales volume.

Forecasts. We raise our FY24-25 net profit forecasts by 9% and 11%, respectively, as: (i) we lift our sales volume growth assumption to 4% (from 2%), and, (ii) we increase our MRP assumption to RM43/mmbtu and RM40.0/mmbtu (from RM40/mmbtu and RM38/mmbtu), assuming higher gas prices in the international market. Our long-term sales volume growth assumption is 2% while MRP is RM40/mmbtu.

Valuations. Correspondingly, we raise our DCF-derived TP by 7% to RM3.55 (from RM3.33) based on an unchanged WACC of 6.5% and a 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 flow generation, anchoring a dividend yield of >6%. However, its valuations are fair at the current level. Maintain MARKET PERFORM.

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 - 27 May 2024