INVESTMENT HIGHLIGHTS

• Government has announced official gas tariff for nonpower sector

• Natural gas tariff set for 1 Jan 2017 to 31 Dec 2019

• Gas Malaysia allowed to implement Gas Cost Pass Through mechanism for fluctuations in gas costs

• Maintain BUY with unchanged TP of RM3.07 per share premised on strong sales, good dividend yield and strong potential upside

Natural gas tariff for 2017 to 2019. Gas Malaysia announced that the government has approved the revision of the natural gas tariff for the non-power sector in Peninsular Malaysia from 1 January 2017 to 31 December 2019.

Fluctuations in gas costs to be passed on. In addition to the Incentive Based Regulations (IBR) regime, Gas Malaysia will be allowed to pass on the fluctuations in gas costs via the Gas Cost Pass Through (GCPT) mechanism every six months.

Gas price for 1H17. As the GCPT mechanism will be put in place, a tariff rebate of RM0.40 per MMBtu will apply to all tariff categories for the period beginning January to June 2017 - translating to an average effective tariff of RM26.31 per MMBtu (2.7% reduction from the previous average tariff).

Incentive-based regulation (IBR) framework. The IBR framework is clearly having a positive impact on the group revenue and earnings as its regulated assets continue to increase. In addition, the IBR will provide financial neutrality to the company with respect with any gas costs fluctuations. Management guided that the increase in volume of gas sold and number of customers will sustain into FY17.

Impact on earnings. No changes made to earnings but we do acknowledge that there could be instances of lumpy cash flows due to the GCPT.

Maintain BUY. We remain positive and reiterating our BUY recommendation with an unchanged target price of RM3.07 per share. Our TP valuation is based on Gordon Growth Model with a riskfree rate (rfr) assumption of 3.9%, market-risk premium of 6.1%, beta of 0.6x and a terminal growth rate of 4%. Gas Malaysia remains as one of our top picks for the sector.

Commendable share price performance. For the 12-month period of 2016, Gas Malaysia has outperformed the FBMKLCI benchmark and is one of the top performing oil and gas stock within our sector. The stock has appreciated by +22.4% within the 12-month period and we believe that it will continue to sustain its value, backed by the earnings stability provided by the IBR. In addition, we believe that the strong dividend will be sustained throughout 2017 despite its aggressive capex plan for the next four years.

Source: MIDF Research - 29 Dec 2016