Gas Malaysia earnings forecasts upgraded

PETALING JAYA: Analysts have revised earnings forecast for Gas Malaysia Bhd upwards, following a strong fourth-quarter earnings performance, which beat consensus expectations.
Its net profit rose 49.22% in the fourth quarter ended Dec 31, 2017 to RM76.98 million from RM51.58 million in the same quarter a year ago, in line with the increase in gas sales volume.
MIDF Research which maintained a “buy” call on the stock at an unchanged target price (TP) of RM3.50, said the surge in earnings is attributable to the higher-than expected sales volume of gas and higher natural gas tariff.
The research house has revised its earnings forecast for FY18 by 7.4% on the back of strong gas sales volume and robust gross domestic product (GDP) growth, while maintaining a conservative dividend payout forecast.
Gas Malaysia declared a second interim dividend of 4.00 sen per share for the financial year ended Dec 31, 2017, bringing total dividend to 8 sen.
“Our TP valuation is based on Gordon Growth Model with a risk-free rate (rfr) assumption of 3.9%, market-risk premium of 6.1%, beta of 0.6x and a terminal growth rate of 4%,” it said.
“We believe that gas sales volume for FY17 registered strong year-over-year growth of more than +8% y-o-y. We were conservatively projecting growth of between 6-6.5%. This is a direct result of strong GDP growth of 5.9% recorded in 2017 compared with 4.2% recorded a year earlier,” it added.
MIDF opined that incentive-based regulation (IBR) framework which came into effect on Jan 1, 2016 has “clearly” had a positive impact on the group’s revenue and earnings as the group’s regulated assets continue to increase.
The framework is also expected to cushion gas costs fluctuation and provide financial neutrality. According to Gas Malaysia’s guidance, sales volume of gas along with acquisition of new customers are likely to be sustained in 2018.
Going forward, growth in the gas sales volume will be primarily driven by the rubber, oleo-chemical, consumer products and glass manufacturing industry which will be supported by robust gross domestic product growth.
High capital expenditure requirement, higher future gearing and structural changes to the local gas pricing and consumption are seen as key risks to earnings outlook and dividend payout.
Meanwhile, Affin Hwang Capital which upgraded the stock to a “buy” call at a TP of RM2.97, also raised its earnings forecast for FY18-19 by 8% and 9% on expectations of better performance from its Combined Heat and Power business and better gas margin spread.
It also expects gas sales volume to normalise off the high base recorded in 2017.
Affin identified economic recession which could affect demand for natural gas and start-up losses from the group’s joint ventures, as potential downside risks.