• Gas Malaysia’s (GMB) 2QFY17 reported earnings rose by +0.8%yoy to RM39.3m

• Growth in earnings premised on strong revenue growth of +32.2%yoy to RM1.3b

• Commendable earnings contributed by higher volume of gas sold

• Maintain BUY with an unchanged TP of RM3.50 per share premised on strong sales, good dividend yield and strong potential upside

Strong sales volume. GMB’s 2QFY17 earnings rose by +0.8%yoy and +15.4%qoq to RM39.3m. The commendable earnings growth is premised on strong growth in revenue of +32.2%yoy to RM1.3b. The strong sales are a result of higher volume of gas sold, upward revision of natural gas tariff and higher tolling fees.

Earnings projection intact. GMB’s cumulative 6MFY17 earnings of RM72.9m broadly kept pace with our and consensus full year FY17 earnings estimates at 41% and 44% respectively. We are expecting stronger quarters ahead as 2H has historically been a stronger period.

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. No change to our earnings estimates at this juncture as we are expecting stronger quarters ahead. This is in-line with our house expectations of Malaysia’s GDP expanding by 5.1% (revised from 4.9% previously) in 2017.

Dividends. Company has declared first interim dividend of 4sen per share representing a dividend payout ratio of 70% from current EPS. GMB typically declares three tranches of dividend payments. This is within our expectations.

Maintain BUY. We are maintaining our BUY recommendation with an unchanged target price of RM3.50 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%.

Source: MIDF Research - 11 Aug 2017