INVESTMENT HIGHLIGHTS

• Gas Malaysia’s (GMB) 2QFY18 reported earnings surged by +42.4%yoy to RM48.1m

• Earnings growth supported by strong sales growth of +17.3% to RM1.5b

• Strong earnings contributed by higher volume of gas sold and higher natural gas tariff

• Declared first interim dividend of 4.5sen

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

Reported earnings surged by +42.4%yoy. GMB’s 2QFY18 reported earnings surged +42.4%yoy to RM48.1m. The company’s 6MFY18 earnings came in broadly within ours and consensus expectations, making up 45.0% and 48% of FY18 earnings estimates. We continue to expect stronger quarters ahead as 2HFY18 is typically a stronger period for GMB. The increase in earnings and revenue yearover-year are largely due to the higher volume of natural gas sold and higher natural gas tariff.

Gas sales volume expected to expand in FY18. We reiterate our view that we opine gas sales volume for FY18 will continue to sustain and register year-over-year growth. Our current gas volume growth projection is 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 rubber, oleo-chemical, 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 to 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 dividend estimates.

Maintain BUY. We are maintaining our BUY recommendation on GMB with an unchanged target price of RM3.50 per share. Our TP valuation is based on Gordon Growth Model with 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 the local gas pricing and consumption.

Source: MIDF Research - 9 Aug 2018