Gas Malaysia Berhad Maintain BUY

IBR proves successful Revised Target Price (TP): RM3.33 (previously RM3.07)

INVESTMENT HIGHLIGHTS

• Gas Malaysia’s (GMB) 4QFY16 reported earnings highest in two years at RM51.6m

• Normalised FY16 earnings excluding impairments and write backs on trade receivables is RM160.1m

• Commendable earnings contributed by higher volume of gas sold

• Maintain BUY with a revised TP of RM3.33 per share premised on strong sales, good dividend yield and strong potential upside

Earnings beat expectations. GMB’s 4Q16 reported earnings rose to highest level in two years to RM51.6m. Excluding the impairments and write backs made on trade receivables of +RM5.01m, the company’s FY16 normalised earnings was RM160.1m. The cumulative full year FY16 earnings exceeded our and consensus earnings forecasts by a variance of more than >10%. The company’s net profit margin for the quarter is the highest in two years at 4.9%.

Commendable rise in revenue. The company’s FY16 revenue rose by +12%yoy, exceeding RM4b largely due to higher volume of gas sold and the upward revision of natural gas tariff. Despite the higher revenue, net margin for the quarter rose by +1.1ppts to 4.1% from the preceding year.

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 rise in new customers acquisition is likely to sustain in FY17.

Impact on earnings. We are pleasantly surprised on the upside by the better-than-expected earnings as we were conservative in the rise in volume sold and tolling fees. As such, we are increasing our FY17 earnings forecasts by +12.7%.

Dividends. Current cumulative dividend for FY16 is 8sen per share.

Maintain BUY. We are maintaining our BUY recommendation with a revised target price of RM3.33 per share. Our TP valuation is based on Gordon Growth Model with a risk-free rate (rfr) assumption of 3.9%, market-risk premium of 6.1%, beta of 0.6x and a terminal growth rate of 4%. In comparison with Petronas Gas, Gas Malaysia is currently trading at a PER of approximately 20x compared with Petronas Gas’ of 22x.

Source: MIDF Research - 16 Feb 2017