This article first appeared in The Edge Financial Daily on February 20, 2018

Gas Malaysia Bhd
(Feb 19, RM2.84)
Upgrade to buy with a higher target price (TP) of RM2.97: Gas Malaysia Bhd’s headline profit surged 57% year-to-year (y-o-y) to RM77 million in the fourth quarter of 2017 (4QFY17) due to an increase in gas sales volume and an upward revision of gas tariff. For the full year, the higher core net profit (+18% y-o-y) was attributable to: an increase in gas sales volume on the back of robust manufacturing activities, an upward revision of gas tariff and a stable gas-margin spread.

Its 4QFY17 results were above expectations as a core profit of RM77 million (+57% y-o-y) came in ahead of both our and consensus estimates, and represented 124% and 117% of forecasts respectively. The positive earnings surprise against our forecast was due to better-than-expected gas sales volume and profit recognised from the combined heat and power (CHP) business. Gas Malaysia declared another four sen interim dividend per share (DPS), bringing year-to-date DPS to eight sen. Higher volume and tariff hikes drove profitability, with 4QFY17 revenue surging 40% y-o-y to RM1.4 billion on higher natural gas sales volume and tariff. Its gross profit margin came in at 7.7% in 4QFY17 (+0.3 percentage point [ppt] y-o-y; +2.5ppts quarter-to-quarter). Contributions from joint ventures (JVs) also recorded a positive surprise as it posted the highest-ever profit of RM2.9 million due to a change in accounting treatment of its CHP business. The effective tax rate was also lower by 4.3ppts y-o-y. All in, this led to a 57% y-o-y increase in 4QFY17 core net profit.

In addition to our FY20 net profit forecast of RM207 million, we raise our earnings per share forecast for FY18 and FY19 by 8% and 9% respectively to incorporate the better performance from its CHP business and better gas margin spread. Meanwhile, we expect volume growth to normalise off the high base recorded in FY17. We also raise our dividend discount model-based TP to RM2.97 (from RM2.89). With a 10% upside potential, we upgrade the stock to “buy”. Key downside risks include: an economic recession affecting demand for natural gas and start-up losses from the group’s JVs. — Affin Hwang Capital, Feb 19