Gas Malaysia 9M Earnings Within Forecast, Says CIMB Research

Gas Malaysia 9M Earnings Within Forecast, Says CIMB Research - Gas Malaysia’s 9MFY17 core net profit was in line at 75% of CIMB Equities Research and 72% of Bloomberg consensus’ full-year forecasts. 

It said on Friday the better 9MFY17 results were driven by higher gas sales volume, tolling fees and assets contributed by customers. 

“We expect the strong momentum to sustain in 4QFY17 as well. Maintain Hold and our target price of RM2.99 based on 21.2 times FY19 price-to-earnings (P/E),” it said.

 CIMB Research said the 9MFY17 revenue rose 29% year-on-year, mainly driven by higher gas sales volume (+10.9% year-on-year), tolling fees (+72% year-on-year) and assets contributed by customers (+4.5% year-on-year). 

Pretax profit increased by 5% year-on-year due to higher gross profit (+9.2 year-on-year), in line with the increase in volume of gas sold. The 9MFY17 core net profit rose 4% year-on-year to RM118mil. 

It said the 3QFY17 revenue grew 31% year-on-year to RM1.4bil, buoyed by the higher volume of gas sold (+12.6% year-on-year) and higher natural gas tariffs.

 Nonetheless, 3QFY17 pretax profit was marginally down 1% due to higher operating expenses despite higher gross profit. 

The lower tax rate (-2% pts) in the quarter lifted 3QFY17 net profit by 3% to RM44mil. 

“Judging from the strong earnings momentum we believe 4QFY17F will likely come in stronger year-on-year as well. 

“Despite the seemingly stable earnings outlook, Gas Malaysia’s earnings profile may change in 2018 once the third-party access (TPA) is implemented,” it said. 

Currently, Gas Malaysia is the owner of its pipeline assets and the sole gas distributor to users that consume less than 5mmscfd of gas. 

Its regulatory capital includes both the book value of its pipeline assets as well as an assumption of working capital required for its distribution business. 

TPA impact likely to be minimal After the TPA kicks in, other parties will be allowed to access Gas Malaysia’s pipelines to distribute gas and the company’s distribution business could cease to be regulated by the IBR. 

As such, its regulatory capital should decline as the working capital that belongs to the distribution business will be separated from the pipeline assets, which should lower its regulatory earnings.

“However, as the distribution business will be a new source of earnings for the company, we think this could offset the decline in regulatory earnings. 

“The gas distribution business will face competition eventually due to new entrants.

“In the long term, the stock’s P/E could de-rate as Gas Malaysia currently has a monopoly in this business. 

“In the short term, however, we think the risk of a P/E de-rating is low because the company will still be the sole gas distributor to its existing customers in the near future. 

“We maintain our Hold rating with an unchanged RM2.99 TP, still based on one-year mean price-to-earnings (P/E) of 21.2 times,” it said.