This article first appeared in The Edge Financial Daily on August 10, 2018
Gas Malaysia Bhd
(Aug 9, RM2.90)
Maintain buy with an unchanged target price (TP) of RM3.50: Gas Malaysia Bhd’s reported earnings in the second quarter ended June 30, 2018 (2QFY18) surged 42.4% year-on-year (y-o-y) to RM48.1 million. The company’s six months of FY18 earnings came in broadly within our and consensus expectations, making up 45% and 48% of FY18 earnings estimates, respectively. We continue to expect stronger quarters ahead as the second half is typically a stronger period for Gas Malaysia. The increase in earnings and revenue y-o-y are largely due to the higher volume of natural gas sold and higher natural gas tariff.
We reiterate our view that gas sales volume for FY18 will continue to be sustained and register y-o-y growth. Our current gas volume growth projection is between 6% and 6.5%. Our assumption is premised on strong national gross domestic product (GDP) growth of 5.5% for 2018. Moving forward, we believe that the growth in the gas sales volume will be primarily driven by the rubber, oleochemical, consumer products and glass manufacturing industries supported by robust 2018 GDP growth of approximately 5.5%.
The Incentive-based Regulation (IBR) framework is clearly having a positive impact on the group revenue and earnings as its regulated assets continue to increase. In addition, the IBR will provide financial neutrality to the company with respect to any gas cost fluctuations. Management guided that the increase in the volume of gas sold and rise in new customer acquisition are likely to be sustained throughout 2018.
We make no changes to our earnings and dividend estimates.
We are maintaining our “buy” recommendation on Gas Malaysia with an unchanged TP of RM3.50 per share, premised on strong sales, good dividend yield and strong potential upside. Our TP valuation is based on the Gordon Growth Model with risk-free rate assumption of 3.9%, market risk premium of 6.1%, beta of 0.6 times and a terminal growth rate of 4%. Key risks to our earnings outlook and dividend payout are: i) high capital expenditure requirement; ii) higher future gearing; and iii) structural changes to the local gas pricing and consumption. — MIDF Research, Aug 9