What’s New

• 4Q16 results beat expectations
• Raised FY17-18F earnings by 10% on better margins
• Gas sales volume growth to drive future core earnings growth
• Maintain HOLD with higher TP of RM2.90

Steady earnings

Maintain Hold. We reiterate our HOLD rating on Gas Malaysia (GMB) as we believe GMB’s growth outlook will remain subdued in the near term, in tandem with the moderation in the industrial sector which is expected to result in uninspiring gas sales volume growth. GMB’s target market are the industrial players, who consume >95% of its gas volume.

Decent FY16 results. GMB’s FY16 earnings came in at RM165m (+56% y-o-y), which is above expectations due to higher-than- expected margins. Margins were steady throughout the year despite the upward revision for local natural gas cost as part of the subsidy rationalisation program due to the full implementation of the cost pass-through mechanism.

Incentive-based mechanism in place. Effective Jan 16, the gas tariff mechanism is based on incentive-based regulation (IBR), which has improved GMB’s earnings clarity. GMB will no longer bear the burden of volatile fuel costs as the tariff will be revised every six months, and volume growth is now the key earnings driver.

Dependent on economic outlook. We expect volume growth to remain subdued in view of the relatively weaker economic outlook, which may reduce gas consumption of industrial players. We understand that gas supply from PETRONAS is not a constraint given the low utilisation at the Malacca regasification terminal.

Valuation

Our DCF-based TP is raised to RM2.90 (8.1% WACC, 3% TG) after incorporating the latest FY16 financials and our earnings revision. The stock is currently trading at 21x FY17F PE, which is not attractive in our view.

Key Risks to Our View

Regulatory risk. Gas tariff revision is subject to government approval, and hence, there is no assurance the bi-annual revision will be implemented.

Source: Alliance Research - 16 Feb 2017