KEY INVESTMENT HIGHLIGHTS

• Gas Malaysia’s 3QFY20 reported earnings met expectations at RM50.9m

• Earnings expanded by +21.2%yoy from higher gas volume sold during the quarter and higher gas contribution margin

• Rubber gloves and consumer products sectors remains the major gas volume driver during the quarter

• New customers and gas contribution margin to continue driving earnings

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

3QFY20 reported earnings expanded by +21.2%yoy to RM50.9m. Gas Malaysia Berhad’s (GMB) reported 3QFY20 earnings came in at RM50.9m. This brings its 9MFY20 reported earning to RM143.4m which was within our and consensus’ full-year FY20 earnings expectations at 74.9% and 71.0% respectively. During the quarter, revenue contracted marginally by -1.9%yoy to RM1,722.1m (from RM1,755.9m in 3QFY19) which was in line with the lower average gas tariff during the quarter. However, earnings expanded by +21.2%yoy during the quarter primarily attributable to higher volume of gas sold during the quarter coupled with higher gas contribution margin. Meanwhile, on a quarterly sequential basis, revenue grew by +11.9% whilst earnings increased by +14.1%qoq attributable to the abovementioned reasons coupled with higher finance income and profit from joint ventures during the quarter under review.

Sales volume driven primarily by gloves and consumer companies. During the quarter, GMB recorded a sales volume of 53.2m MMBtu which was a +11.7%qoq from 47.6M MMBtu in 2QFY20 and +0.2%yoy from 53.1m MMBtu in 3QFY19. The rubber gloves manufacturers, consumer and oleo-chemicals producers remained as the major contributors of GMB’s gas off-take during the quarter recording 37%, 17% and 13% of GMB’s total gas volume off-take during the quarter. Furthermore, there were notable increases of gas off-take from the steel, aluminum and copper producers as well as; ceramic producers during the quarter which helped to cushion the impact from the lower tariff. That said, YTD sales volume has yet to catch up with the volume GMB recorded back in FY19. YTD sales volume was recorded at 150.6m MMBtu vs 153.3m MMBtu during the same period last year and Management expects that the full-year FY20 sales volume would remain below that of its FY19.

New customers and higher gas contribution margin to sustain earnings in FY20. As previously guided by the Management, GMB has secured 41 new customers YTD. This is in-line with its target of signing up 40-60 new customers in FY20. We reiterate our view that GMB’s earnings in FY20-21F will continue to be underpinned by its ongoing acquisition of new customers as well as; the gas contribution margin – which could drive the earnings growth going forward. While the margins for both Gas Malaysia Distribution Sdn Bhd (GMD) and Gas Malaysia Energy and Services Sdn Bhd (GMES) are generally fixed under the third-party agreement (TPA) however; the margins may still vary depending on the type of customers. The margins will usually be higher when heavy volume customers off-take more gas from GMB and vice versa. We understand from the Management that the heavy volume customers made up 54% of its latest total gas off-take which in return could skew the margin to the higher side moving forward.

Potential upside in fourth quarter from revenue cap accruals. We also understand from the Management that there will be revenue adjustment in the fourth quarter of FY20. This expected adjustment is to take into account the difference between actual volume and approved volume by the Energy Commission during the year which will be accrued in the fourth quarter of FY20. While no guidance was given on how much revenue adjustment GMB will be able to claim from the EC; however, we estimate this adjustment to amount to about RM15-20m.

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. We have yet to incorporate the contribution from the revenue cap accruals as it has yet to be approved by the Energy Commission.

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 continue to like GMB due to its: (i) Well-diversed and high-volume industrial customer base; (ii) attractive FY21F dividend yield of 5.1% and; (iii) growing pressure on manufacturers nationwide to use 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) potential structural changes to the local gas pricing and consumption and; (ii) prolonged global economic slowdown which could impact gas off-take.

Source: MIDF Research - 13 Nov 2020