Highest return on equity over three years: Utilities: Gas Malaysia Bhd - Rising gas demand fuels steady earnings growth

This article first appeared in The Edge Malaysia Weekly, on December 14, 2020 - December 20, 2020.
Highest return on equity over three years: Utilities: Gas Malaysia Bhd - Rising gas demand fuels steady earnings growth
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Those who expected Gas Malaysia Bhd to be a typical utility stock that offers steady income but little earnings growth may have been proved wrong.

Gas Malaysia’s core business is the selling and distribution of natural gas to industrial customers and households. Hence, its earnings growth is very much in line with the demand for natural gas, which has been on the rise over the years.

The company is licensed under the Gas Supply Act 1993 to supply and sell reticulated natural gas in Peninsular Malaysia. In December 2000, it was granted the licence to supply and sell reticulated liquefied petroleum gas (LPG).

On top of that, Gas Malaysia has another important task, which is to develop, operate and maintain the Natural Gas Distribution System in Peninsular Malaysia — the backbone infrastructure for fuel distribution on this side of the country.

As at end-2019, the company operated and maintained 2,468km of gas pipeline across the peninsula, supplying natural gas to 933 industrial customers, 1,056 commercial customers and 12,620 residential customers. It also supplies LPG to 1,272 commercial customers and 20,289 residential customers.

Gas Malaysia sources natural gas from Petroliam Nasional Bhd (Petronas) through its public-listed unit Petronas Gas Bhd.

The consistent growth in industrial demand for natural gas helped to fuel the increase in the company’s earnings over the past three financial years, FY2017 to FY2019 ended Dec 31. Its revenue grew from RM4.05 billion in FY2016 to RM5.31 billion in FY2017, RM6.23 billion in FY2018 and RM6.88 billion in FY2019. A revision in tariffs also helped to boost its turnover in FY2019.

The company’s profit after tax (PAT) returned to the growth track after it dipped to RM160.7 million in FY2017 from RM164.4 million in FY2016. Its PAT then grew 12.3% year on year to RM180.4 million in FY2018 and 5.4% y-o-y to RM190.1 million in FY2019.

The growth in PAT enabled the company to achieve a return on equity (ROE) of 15.8% in FY2017, 17.7% in FY2018 and 18.4% in FY2019. This translates into an adjusted weighted ROE of 17.7% over the three years — the highest among the companies listed in the utility sector of Bursa Malaysia with a market capitalisation of RM1 billion and above, making it this year’s winner of The Edge Billion Ringgit Club award in this category.

Gas Malaysia rewards its shareholders with regular dividends. It declared a dividend per share of 13 sen in FY2017, 13.5 sen in FY2018 and 14.1 sen in FY2019.

According to Bloomberg, eight out of the nine investment analysts who cover Gas Malaysia have a “buy” recommendation on the utility stock. The average target price is RM3.06.

“We expect Gas Malaysia’s regulated earnings to remain steady under the incentive-based regulation (IBR) regulatory period 1 (RP1, 2020-2022) revenue-cap regime. But its unregulated shipping division could face challenges from weaker gas consumption,” CGS-CIMB Securities wrote in its quarterly results review dated Nov 12.

“We gather that the IBR regulatory revenue adjustment for FY2020 could happen in the fourth quarter of this year, and Gas Malaysia will likely see an under-recovery in revenue due to the shortfall in allowable volume growth.”

The research outfit has a “buy” call on the stock in view of its relatively stable earnings and decent dividends as potential rerating catalysts.

Kenanga Research, which has a “market perform” call on the counter, wrote that it is positive on Gas Malaysia’s long-term earnings prospects given the margin spread of above RM2/mmbtu, which will increase its earnings on the back of volume growth. “However, we reiterate our ‘market perform’ rating with an unchanged DCF-derived target price of RM2.85, as we believe the positives are already reflected in the share price. Our recommendation is supported by an attractive dividend yield of about 5%. Upside risk to our call is a higher-than-expected volume growth,” it says.