Gas Malaysia Bhd
(April 17, RM2.68)
Maintain hold, with a target price of RM2.50: We believe there is a low likelihood of negative earnings surprise for Gas Malaysia Bhd’s (GMB) upcoming first quarter financial year 2015 (1QFY15) results, partly due to seasonally lower gas usage in 1QFY15, which reduces the need to use the more expensive liquefied natural gas (LNG).

Following the downgrade in consensus earnings estimates by about 30% to 40% since GMB’s 4QFY14 results, we believe there is a low likelihood of a negative earnings surprise for 1QFY15.

We believe GMB would likely see better earnings on quarter-on-quarter (q-o-q) basis due to lower LNG volume from seasonally lower gas usage.

We have kept our earnings forecasts unchanged at this juncture. We note that our earnings forecasts for 2015-17 are 10% to 30% lower than consensus, which we attribute to our more conservative assumption on GMB’s profit margins because of the downside risk from potentially higher LNG volume (that is at higher cost).

Despite the challenges that GMB is facing, we believe GMB will likely maintain a 100% dividend payout going forward given minimal borrowings and a healthy balance sheet.

Note that subsequent to GMB’s 4QFY14 results announced on Feb 12, GMB had declared a final dividend per share (DPS) of 4.1 sen on March 12.

This implied that for 2014, GMB’s cumulative DPS stood at 13.1 sen, translating into a 100% payout ratio (2013: 100%)

It is still difficult to forecast GMB’s future profit margins unless there is a proper cost pass-through mechanism in place to address the usage of LNG.

Therefore, in the short term we believe the stock lacks a rerating catalyst. — Affin Hwang Research, April 17

This article first appeared in The Edge Financial Daily, on April 20, 2015.