This article first appeared in The Edge Financial Daily on May 17, 2019

Gas Malaysia Bhd
(May 16, RM2.85)
Maintain hold with a higher target price (TP) of RM3.02: Gas Malaysia Bhd reported a decent set of first quarter financial year 2019 (1QFY19) numbers, which were within our and consensus expectations. Gas sales volume was up 2% year-on-year (y-o-y), but down 7% quarter-on-quarter (q-o-q) at 47.9 million British thermal units due to seasonality.

We see no excitement in earnings and company prospects at least until more clarity on the incentive-based regulation framework is established, which we understand is still in the midst of being submitted to the Energy Commission. We make no changes to our earnings forecasts and maintain our “hold” rating with a slightly higher dividend discount model (DDM)-based TP of RM3.02 upon rolling forward our valuation horizon.

Gas Malaysia’s 1QFY19 earnings met our and market estimates, accounting for 20% and 21% of the respective full-year forecasts. First quarter is seasonally Gas Malaysia’s weakest quarter. Core net profit was up 2.4% y-o-y supported by the upward revision in natural gas tariff and gas sales volume growth of 2%. The operating margin for 1QFY19 was relatively flat y-o-y, as expected.

Revenue was down 1.3% q-o-q to RM1.7 billion. With a stable operating margin and higher associate contribution, offsetting the higher tax rate, core net profit was down a similar 1.2%.

We fine-tune our earnings forecast following the release of the updated 2018 audited numbers. We maintain our “hold” rating but raise our DDM-based 12-month TP of RM3.02 as we roll forward our valuation horizon but lower terminal growth to 3%. Gas Malaysia offers a decent earnings for 2019 dividend yield of 4.6% based on our dividend payout assumptions of 85% (Gas Malaysia’s minimum dividend payout policy at 75%).

Key upside risks include higher-than-expected sales volume and better margins. Key downside risks would be an economic recession affecting demand for natural gas and start-up losses from the group’s joint ventures. — Affin Hwang Capital, May 16