INVESTMENT HIGHLIGHTS

• Gas Malaysia’s (GMB) 4QFY18 reported earnings declined by -16.7%yoy to RM51.1m

• Earnings growth supported by strong sales growth of +19.4% to RM1.7b

• Earnings cushioned by higher volume of gas sold and higher natural gas tariff

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

Reported earnings declined -16.7%yoy despite revenue expansion. GMB’s 4QFY18 reported earnings declined by -16.7%yoy to RM51.1m vs RM61.3m in 4QFY17. This brings the company’s cumulative FY18 earnings to come in broadly within ours and consensus expectations at RM180.4m, making up 93% and 96% of our and consensus’ FY18 earnings estimates respectively. The decline is mainly due to lower gas contribution margin recognised during the quarter as a result of a one-off catch up Gas Cost Pass Through (GCPT) adjustment made in the preceding quarter. That said, earnings during the quarter was supported by revenue which expanded by +19.4%yoy largely due to the higher volume of natural gas sold and higher natural gas tariff.

Gas sales volume expected to continue to expand in FY19. We reiterate our view that we opine gas sales volume for FY19 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 resilient national GDP growth of 4.9% for 2019. 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 2019 GDP growth of approximately 4.9%.

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 made to our earnings 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 3.2%, 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 - 15 Feb 2019