This article first appeared in The Edge Financial Daily on May 31, 2018
Gas Malaysia Bhd
(May 30, RM2.98)
Maintain hold with a higher target price (TP) of RM3: Gas Malaysia Bhd’s (GMB) first quarter of financial year 2018 (1QFY18) results were broadly in line with expectations with net profit accounting for 22% of our and consensus full-year estimates. Both revenue and earnings saw increases of 21% and 23% respectively on the back of the 9% higher gas sales volume and natural gas tariff.
Nevertheless, earnings growth will likely normalise this year given the high margin spread base recorded in 2017. Operating margin was relatively flat year-on-year due to higher operating expenses. Maintain “hold” with a slightly higher TP of RM3.00.
Sequentially, the 4% drop in gas sales volume led to revenue declining by 2.4%. The operating margin declined 2.7 percentage points on higher operating expenses, while the bigger net profit decline of 48% was due to weaker associate earnings and higher taxes. Associate contribution declined 70% due to the full-year profit recognition of the combined heat and power business in the previous quarter.
We raised our discount dividend model-based 12-month TP to RM3.00 after rolling forward our valuation to 2019 estimate and tweaking our 2018 to 2020 earnings per share forecasts by 0.6% to 3.5%. GMB paid out 86% of its profit in 2017, in line with our dividend payout assumption of 85% going forward.
Key upside risks include higher-than-expected sales volume and a better margin spread. Downside risks include an economic recession affecting demand for natural gas. — Affin Hwang Capital Research, May 30