News  Yesterday, Gas Malaysia (GASMSIA) entered into two separate JV agreements with: 1) Energy Advance Co Ltd (ENAC) (66:34 JV) to undertake the business of provisioning electricity and steam through Combined Heat and Power (CHP) System to industries in Malaysia. ENAC is a wholly-owned subsidiary of Tokyo Gas Co Ltd, which owned 18.5% stake in Gas Malaysia, and 2) IEV Energy Sdn Bhd (IEV) (75:25 JV) to undertake the Compressed Natural Gas (CNG) Distribution system for areas that are not accessible by gas pipeline.

Comments  While the CHP business with ENAC is new business to GASMSIA, it is not entirely a new undertaking to the group as it has been working on this since its listing back in 2012.

 The CNG is mainly to cater for areas in Pahang, which are not accessible by gas pipeline, from its mother station at Gebeng. The JV expects to provide 300,000 mmbtu/year of CNG at the initial stage.

 It is still early days with earnings contribution expecting to be insignificant in the near-term, especially the volume for CNG is small for now while it will take two years to build a site for CHP. Nevertheless, these ventures will broaden GASMSIA’s earnings base from its current gas distribution only to include energy business.

 Overall, we are positive on these ventures with meaningful earnings contribution expected in 3-5 years. GASMSIA will be transformed from solely a gas distributor into an energy asset owner as well.

Outlook  Earnings impact from these two JV is expected to be insignificant in the near-term but could be meaningful in 3-5 years time. This would provide a new earnings stream to the group.

 FY14 is expected to be another strong year with full-year earnings impact from the 40MMScfd gas supply which started from July 2013 and another new additional 30MMScfd commencing Jan 2014 from the Melaka RGT. The last portion of the 40MMScfd additional gas supply from the same RGT will be coming on-stream in Jan 2015, which will ensure consistent earnings growth in the future.

Changes To Forecasts  There are no changes to our FY14E and FY15E earnings estimates for now. We may look to review our earnings model once more details of these JVs are revealed by the management.

Rating MAINTAIN UNDERFORM

Valuation  Price target maintained at RM3.41/share based on DCF.

Risks to Our Call  A surprise increase in gas supply allocated by Petronas and wider margin spread. 

Source: Kenanga