INVESTMENT HIGHLIGHTS

• Gas Malaysia’s (GMB) 3QFY17 reported earnings rose by +2.9%yoy to RM44.5m

• Growth in earnings premised on strong revenue growth of +31.4%yoy to RM1.4b

• 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 3QFY17 reported earnings rose by +2.9%yoy to RM44.5m. Excluding impairments and write-backs on trade receivables of +RM4.338m (net), GMB’s cumulative 9MFY17 earnings of RM122.0m largely met our and consensus expectations, accounting for 69.4% and 74.2% of full year FY17 earnings estimates respectively. We are expecting stronger quarters ahead as 2H has historically been a stronger period. The higher earnings recorded is mainly due to higher volume of gas sold and higher natural gas tariff.

Gas sales volume to expand in FY17. Gas sales volume for FY17 is expected to register strong year-over-year growth of approximately +8.6%yoy (conservative projection is between 6-6.5% growth). This is premised on our house expectations that Malaysia could record a GDP of 5.1% for full year 2017. The growth in the gas sales volume will be primarily driven by the rubber, oleo-chemical, consumer products and glass manufacturing industry.

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% and 5.5% in 2017 and 2018 respectively.

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 - 10 Nov 2017