This article first appeared in The Edge Financial Daily on August 15, 2017

Gas Malaysia Bhd
(Aug 14, RM3.02)
Reiterate buy with an unchanged target price (TP) of RM3.50: To recap, Gas Malaysia Bhd’s second quarter ended June 30, 2017 (2QFY17) earnings rose by 0.8% year-on-year (y-o-y) and 15.4% quarter-on-quarter (q-o-q) to RM39.3 million. The commendable earnings growth is premised on strong growth in revenue of 32.2% y-o-y to RM1.3 billion. The strong sales are a result of higher volume of gas sold, upward revision of natural gas tariff and higher tolling fees.

Gas sales volume for the 2017 financial year (FY17) is expected to register strong year-over-year growth of approximately 8.6% . This is premised on our house expectations that Malaysia could record a gross domestic product of 5.1% for FY17. The growth in the gas sales volume will be primarily driven by the rubber, oleo-chemical, consumer products and glass manufacturing industries.

In the first half of 2017, Gas Malaysia managed to secure 21 new industrial customers, growing its industrial customer base from 837 currently. The industrial customers segment alone contributes 99.1% of the total volume demand from Gas Malaysia. A large proportion of industrial customers is from the rubber products segment at 32%, and food and beverage as well as tobacco at 25%. In three years, Gas Malaysia aims to acquire an additional 200 new industrial customers.

Gas Malaysia has planned an additional 500km of pipeline requiring a total capital expenditure (capex) of RM525 million. Between RM150 million and RM200 million is planned for its non-regulated business expansion.

We are maintaining our earnings estimates for Gas Malaysia at this juncture, expecting stronger gas sales volume and earnings. We are conservative in our dividend payout forecast of 90% despite the company having paid out 100% of earnings in past years. Our conservatism is largely premised on heavy capex requirements and over or under-recovery of gas cost arising from variance between actual market price and the forecast market price used for determining the current tariffs, which will affect the company’s cash flow.

We are maintaining our buy recommendation with an unchanged TP of RM3.50 per share. Our TP valuation is based on the Gordon Growth Model with a 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%. — MIDF Research, Aug 14