INVESTMENT HIGHLIGHTS

• Gas Malaysia’s (GMB) 2QFY19 reported earnings grew marginally by +1.9%yoy to RM49.0m

• Earnings growth driven by strong sales growth of +15.5% to RM1.7b

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

• Maintain BUY with an unchanged TP of RM3.11 per share

Reported earnings grew by +1.9%yoy premised on +15.5%yoy revenue expansion. GMB’s 2QFY19 reported earnings grew marginally by +1.9%yoy to RM49.0m vs RM48.1m in 2QFY18. It made up 49% and 47% of our and consensus’ FY19 earnings estimates respectively. The marginal increase is mainly due to: (i) lower other operating income and; (ii) higher operating expenses. However, this was offset by share of losses from joint venture companies. That said, earnings during the quarter was supported by revenue which expanded by +15.5%yoy largely due to 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 remains between 5.0-5.5% similar to that of FY18. Our assumption is premised on resilient national GDP growth of 4.7% for 2019.

New customer acquisitions to drive growth. While we opine that FY19F’s gas volume sold will sustain at current level for the remaining of the year; Management has recently guided that FY20F will see growth coming in from the increase in volume of gas sold in-line with its recently acquired customers. Our recent meeting with the Management signals that growth in the gas sales volume will continue to be driven primarily by rubber, oleo-chemical, consumer products and glass manufacturing industries. Hence, we are expecting a +6.3%yoy increase in EPS due to this.

First interim dividend of 4.8sen declared. In-line with its higher earnings for the quarter; GMB’s has also declared its first interim dividend of 4.8sen per share. This is as opposed to the 4.5sen declared during the same period last year which represents an increase of +6.7%yoy. The dividend declared translates to about 1.68% yield to yesterday’s closing price.

Impact on earnings. We made no changes to our earnings estimate at this juncture as we are expecting Gas Malaysia to meet our FY19F earnings projection.

Maintain BUY. We are maintaining our BUY recommendation on GMB with an unchanged target price of RM3.11 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%. We remain positive on GMB given that: (i) Malaysia is on track to meet a sustainable GDP growth of 4.7% in 2019; (ii) GMB’s effort in acquiring new customers and; (iii) growing pressure on manufacturers nationwide on the usage of clean energy such as: natural gas in their operations which we opine will assist in pushing up the volume for GMB. 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 - 20 Aug 2019