Gas Malaysia Bhd
(Feb 23, RM2.65)
Downgrade to hold rating with a lower target price (TP) of RM3.03. We cut our financial year ending Dec 31, 2015 (FY15) and FY16 earnings forecasts by 26% and 31% respectively. Our previous optimism over the company’s outlook was unjustified as we did not consider the fact that Gas Malaysia’s sales volumes would grow beyond the threshold for gas subsidy, resulting in declining margins. 

Our TP is lowered to RM3.03, based on 22 times FY16 price-earnings ratio as we widen the discount to Petronas Gas Bhd’s valuation, given the latter’s more secure earnings underpinned by its fixed agreements.

Gas Malaysia’s fourth financial quarter ended Dec 31, 2014 (4QFY14) core net profit of RM23.3 million took the full-year figure to RM167 million, 13% short of our and consensus forecasts. The main culprit was a subpar gross margin which fell about 6% due to the use of liquefied natural gas (LNG).

Although a higher volume of gas sold fuelled a 29.2% rise in 4QFY14 revenues, gross profit slumped 43% year-on-year (y-o-y). The weaker gross profit was mainly due to higher feedstock costs as Gas Malaysia used LNG to supply its customers. 

Around 70% to 80% of Gas Malaysia’s gas volumes are subsidised and priced at RM15.55 per mmbtu while LNG is priced at RM40 to RM45 per mmbtu. 

As a result of the weaker gross margins, Gas Malaysia’s 4QFY14 core net profit fell by 41.6% y-o-y and 56.6% quarter-on-quarter.

In tandem with the weak earnings, Gas Malaysia’s dividend payout ratio was reduced from 100% in FY13 to 69% in FY14, equivalent to a nine sen total dividend per share (five sen and four sen interim dividends). 

We are disappointed with the lower payout ratio, though we recognise that the payout ratio has been lowered to ensure that there is sufficient cash to acquire feedstock, given the weak earnings and uncertain gas cost outlook in FY15. — CIMB Research, Feb 13

This article first appeared in The Edge Financial Daily, on February 23, 2015.