KEY INVESTMENT HIGHLIGHTS

• Gas Malaysia’s 2QFY20 reported earnings met expectations at RM44.6m
• Both revenue and earnings slid as lower volume of natural gas sold was recorded due to implementation of MCO
• Rubber gloves and consumer products sectors cushioned earnings as both sectors remain in operation during MCO
• Addition of new industrial customers to sustain earnings
• FY20-21F earnings maintained
• Maintain BUY with an unchanged TP of RM3.11 per share

2QFY20 reported earnings contracted by -8.9%yoy to RM44.6m. Gas Malaysia Berhad’s (GMB) reported 2QFY20 earnings came in at RM44.6m. This brought its 6MFY20 reported earning to RM92.5m which was within our and consensus’ full-year FY20 earnings expectations at 48.4% and 50.6% respectively. During the quarter, revenue contracted by -11.3%yoy to RM1,539.6m (from RM1,736.7m in 2QFY19) primarily attributable to due to lower volume of gas sold and; lower average gas tariff during the quarter. Similarly, earnings contracted by -8.9%yoy during the quarter due to the implementation of Movement Control Order (MCO) by the Malaysian government to curb the spread of Covid19. Meanwhile, on a quarterly sequential basis, revenue declined by -4.1% whilst earnings contracted by -6.8%qoq attributable to the abovementioned reasons coupled with higher overheads and depreciation incurred during the quarter under review.

Sales volume mildly impacted during MCO. The first phase of implementation of the MCO by the Malaysian government started on the 18th of March 2020 and it was extended until 9th May 2020. This was the period where gas off-takes were highly impacted during the quarter as businesses were restricted from operating except for several industries which were identified as essentials. Following this, sales volume for 2QFY20 was recorded at 47.6m MMBtu, which represents a -3.4% decline year-over-year and a -4.4% decline quarter-on-quarter. The decline was marginal given that businesses were allowed to resume operations gradually from May 9th onwards. Furthermore, industries such as glove manufacturing and consumer products, which are also GMB’s main customers, remained in operation during the MCO period. This had helped to arrest the decline in sales volume originating from other industries.

First interim dividend of 4.25sen declared. For the 1H of FY20, GMB has declared its first interim dividend of 4.25sen. This is -11.5% lower year-over-year from its 2QFY19 dividend of 4.80sen per share. However, the lower dividend is in-line with the lower earnings recorded during the period which was within our expectations. Subsequently, the dividend declared also represents a 59% payout out of its 1HFY20 EPS of 7.20sen and an annualised yield of 3.0% against its second quarter’s closing price of RM2.80.

New customers to sustain earnings in FY20. Following the expected year-over-year contraction in sales volume as a result of the implementation of MCO; we reiterate our view that earnings growth for GMB going forward will mainly be driven by: (i) expansion of existing customers’ volume and; (ii) better margins resulting from the recently implemented Third Party Access (TPA) regulation.

Management guided that FY20 will see earnings to be sustained partially by the new volume of gas sold in-line with its recently acquired customers. We understand that the Management has targeted 40-60 new industrial customers in FY20 where, as of June 2020, it has managed to secure about 21 new customers. The off-take in volume for these customers however remains dependent on the respective businesses’ future plans. That said, we note that as the businesses expands, more gas will be required for operations. Notably, GMB is also in progress to build more facilities up in the north between Kedah and Perlis which would further increase the gas off take from GMB. This, we opine will also assist to ease the impact from the current Covid19 pandemic crisis.

Sales volume to be driven by gloves, consumer and oleo-chemicals. We also note that, growth in the gas sales volume going forward will continue to be driven primarily by rubber, oleo- chemical, consumer products and glass manufacturing industries. In 2QFY20, the volume contribution from glove manufacturers has increased to almost 40% from 33-34% in 1QFY20 whilst the volume contribution from consumer products manufacturers and oleo-chemicals manufacturers have also shown an increase quarter-over-quarter. We opine that this will continue to be the case as the world enters into a phase called the “new normal” post-Covid19 pandemic crisis - which will drive the change in human behaviour and consumer consumption patterns that will benefit these industries.

Impact on earnings. We made no changes to our earnings estimate at this juncture as we are expecting Gas Malaysia to meet our FY20F earnings projection. While Covid19 has impacted the sales volume for GMB, we have projected earlier that the off-take of gas will gradually improved post-MCO as businesses resumes operation. Furthermore, we understand that in June and July 2020, sales volume has almost reached the pre-Covid19 level. This, we opine will cushion the impact from the loss in off-take from other companies that had to close down during the MCO.

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) Well-diversed customer base; (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 - 14 Aug 2020