We expect GASMSIA to post another strong set of quarterly results in 2QFY24 with a net profit of c.RM100m-RM105m (vs. 1QFY24A: RM102.3m) on the back of higher gas selling prices albeit a flattish sales volume. This will be in-line with expectations. We keep our forecasts, TP of RM3.59 and MARKET PERFORM call. The stock is supported by an above average dividend yield of >6%.

We expect GASMSIA to post another set of strong quarterly results in 2QFY24, due out later this month, with a net profit of c.RM100mRM105m, against RM102.3m reported in 1QFY24 (see Exhibit 1 for GASMSIA’s historical quarterly earnings), bringing its cumulative 1HFY24 net profit to about RM202.3m-RM207.3m. This will be at 56% to 57% our full-year forecast and 55% to 56% of the full-year consensus estimate but we will consider it within expectations given a softer 2H on weaker gas prices.

While historically 2Q sales volumes eased sequentially to the tune of 2% to 3% (see Exhibit 2), we expect 2QFY24 sales volume to hold up sequentially (vs. 1QFY24A: 38.3m GJ) on a general pick-up in business activities, especially the glove sector, which had reported four consecutive quarters of sales volume growth after bottoming out in 2QFY23.

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 (see Exhibit 3). However, due to oversupply coupled with sharp decline in demand post pandemic, the glove sector only made up to 20% of the group’s sales volume in 3QFY23. The sharp decline was partly due to: (i) it having lost one of its glove maker accounts to its competitor after the gas market liberalisation in 2022, and (ii) lower demand on local glove makers’ market share loss to Chinese producers which aggressively expanded their capacity during the pandemic era.

Meanwhile, its 2QFY24 gas selling price and retail margin would have improved sequentially. This is because the gas selling price is pegged to Malaysia Reference Price (MRP) plus a factor called beta while GASMSIA earns a retail margin calculated based on a percentage to the gas selling price. MRP is estimated to have risen 6% QoQ to RM44.12/mmbtu from RM41.51/mmbtu in 1QFY24 (see Exhibit 4) as Brent prices improved.

Forecasts. Maintained.

Valuations. We maintain our DCF-derived TP of RM3.59 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 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 - 5 Aug 2024