Gas Malaysia Bhd
(Aug 14, RM2.10)
Maintain hold with a reduced target price (TP) of RM2.30 from RM2.40 previously: Gas Malaysia Bhd’s (GMB) second quarter of financial year 2015 (2QFY15) earnings grew 18% quarter-on-quarter (q-o-q) but fell 31% year-on-year (y-o-y) to RM33.7 million, on the back of a revenue of RM795 million (+4% q-o-q; +17% y-o-y).

This takes first half of FY15 (1HFY15) earnings to 42% of our full-year forecast — within expectations — as we expect 2HFY15 earnings to come in stronger, in view of the 10.3% increase in gas tariff effective July 1, which outpaced the 8.8% increase in gas cost.

2QFY15 gross margin improved to 6.3% (compared with 6.1% in 1QFY15 and 4.4% in 4QFY14) due to higher volume of gas sold during the quarter.

GMB declared a lower interim dividend per share of 3.5 sen for 2QFY15, compared with five sen for 2QFY14, reflecting the lower profit for 1HFY15 (-31% y-o-y). Nevertheless, balance sheet remained healthy with a net cash of RM274 million.

Effective Jan 16, the gas tariff mechanism is based on incentive-based regulation, which improves earnings clarity of GMB with an estimated margin of RM1.58/mmBtu. Liquefied natural gas supply is expected to make up 10% of GMB’s gas purchases this year, compared with 4% in FY14.

GMB will no longer bear the burden of volatile fuel costs as the tariff will be revised every six months, and volume growth will be its key earnings driver going forward. The management is looking at a 7% to 9% gas consumption growth in FY15, versus our conservative 5% assumption.

GMB recently announced that the government had increased the natural gas tariff for non-power sectors by 10.3% to RM21.80/mmBtu (from RM19.77), effective July 1. This is a significant relief to address the high gas procurement cost.

We have revised down slightly our discounted cash flow-based TP to RM2.30 (8.7% weighted average cost capital; 3% TG) after toning down our volume growth assumptions beyond FY17. The stock is currently trading at 18 times FY15 price-earnings ratio, which is not attractive. — AllianceDBS Research, Aug 14

This article first appeared in digitaledge Daily, on August 17, 2015.