INVESTMENT HIGHLIGHTS

• Gas Malaysia’s (GMB) 1QFY18 reported earnings grew by +18.1%yoy to RM40.2m

• Earnings growth supported by strong sales growth of +20.9%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

Sustained strong gas sales volume. GMB’s 1QFY18 reported earnings surged by +18.1%yoy to RM40.2m. The company’s 3MFY18 earnings kept pace with ours and consensus expectations, making up 20.2% and 22.0% of FY18 earnings estimates respectively. We are expecting stronger quarters ahead as 2HFY18 is typically a stronger period. The increase in earnings and revenue year-over-year are largely due to higher higher volume of gas sold and higher natural gas tariff.

Gas sales volume expected to expand in FY18. We believe that gas sales volume for FY18 will continue to sustain and to register yearover-year growth. Our gas volume growth projection is currently between 6-6.5%. Our assumption is premised on strong national GDP growth of 5.5% for 2018. Moving forward, we believe that the growth in the gas sales volume will be primarily driven by the rubber, oleochemical, consumer products and glass manufacturing industry supported by robust 2018 GDP growth of approximately +5.5%.

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 throughout 2018.

Impact on earnings. No changes to earnings and dividends estimates.

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%. Key risks to our earnings outlook and dividend payout are: (i) high capex requirement; (ii) higher future gearing and; (iii) structural changes to of the local gas pricing and consumption.

Source: MIDF Research - 30 May 2018