This article first appeared in The Edge Financial Daily on August 21, 2019
Gas Malaysia Bhd
(Aug 20, RM2.86)
Maintain buy with an unchanged target price (TP) of RM3.11: Gas Malaysia Bhd’s second quarter of financial year 2019 (2QFY19) reported earnings grew marginally by 1.9% year-on-year (y-o-y) to RM49 million versus RM48.1 million in 2QFY18. It made up 49% and 47% of our and consensus’ financial year ending 2019 earnings estimates respectively.
The marginal increase is mainly due to lower other operating income and higher operating expenses. However, this was offset by a share of losses from joint-venture companies. That said, earnings during the quarter was supported by revenue which expanded by 15.5% y-o-y largely due to higher volume of natural gas sold and higher natural gas tariff.
We reiterate our view that we opine gas sales volume for FY19 will continue to sustain and register y-o-y growth. Our current gas volume growth projection remains between 5% and 5.5% similar to FY18. Our assumption is premised on resilient national gross domestic product (GDP) growth of 4.7% for 2019.
While we opine that FY19F’s (forecast) gas volume sold will sustain at the current level for the remaining of the year, the management has recently guided that FY20F will see growth coming in from the increase in volume of gas sold in line with its recently acquired customers. Our recent meeting with the management signals that growth in the gas sales volume will continue to be driven primarily by rubber, oleo-chemical, consumer products and glass manufacturing industries. Hence, we are expecting a 6.3% y-o-y increase in earnings per share due to this.
In line with its higher earnings for the quarter, Gas Malaysia has also declared its first interim dividend of 4.8 sen per share. This is as opposed to the 4.5 sen declared during the same period last year which represents an increase of 6.7% y-o-y. The dividend declared translates to about 1.68% yield to Monday’s closing price.
We made no changes to our earnings estimate at this juncture as we are expecting Gas Malaysia to meet our FY19F earnings projection.
We are maintaining our “buy” recommendation on Gas Malaysia with an unchanged TP of RM3.11 per share. Our TP valuation is based on the Gordon Growth Model with risk-free rate assumption of 3.2%, market risk premium of 6.1%, beta of 0.6 times and a terminal growth rate of 4%. We remain positive on Gas Malaysia given that: i) Malaysia is on track to meet a sustainable GDP growth of 4.7% in 2019; ii) Gas Malaysia’s effort in acquiring new customers and; iii) growing pressure on manufacturers nationwide on the usage of clean energy such as: natural gas in their operations which we opine will assist in pushing up the volume for Gas Malaysia. Key risks to our earnings outlook and dividend payout are: 1) high capital expenditure requirement; 2) higher future gearing; and 3) structural changes to the local gas pricing and consumption. — MIDF Research, Aug 20