• We favour Gas Malaysia Berhad (GMB) as the leading player in  natural gas distribution within Peninsular Malaysia. The group’s  prospects are supported by the lucrative recurring income from  the pipeline asset subsequent to the liberalised gas market.

• We slashed our FY23F-24F earnings forecasts by 11%-12% however, after incorporating a lower RP2 tariff revision in its  gas distribution segments, incoming Malaysia Reference Price  (MRP) that is expected to normalize. This is in addition to headwinds like a prolonged Ukraine-Russian war, inflationary  pressures and rising labour cost.

• Reiterate our BUY call on GMB with a lower TP of RM3.67  (RM3.75 previously) following our earnings downgrade. Our  valuation is pegged at 12.9x PER of FY23F EPS of 28.4sen.

GMB’s Market Share to Stay Intact Despite Liberalisation

GMB announced that the current Base Average Tariff under the  Incentive-Based Regulation (IBR) framework in RP2 is maintained at  RM1.573/GJ/day. The tariff is for users under its Gas Malaysia  Distribution (GMD) business which take effect from January 1 st 2023  until December 31st, 2025. However, a rebate of 3.8 sen will be applied exclusively in 2023, pushing the rate to RM1.535/GJ/day for  all types of utilization. Notwithstanding that, we opine the tariff  impact to be ‘neutral’ as the business is supported by revenue-cap  adjustment element which would ensure a guarantee rate of return  from its NGDS expansion projects. Apart from that, management  highlighted that demand from GMB’s major industrial segment  (Rubber Gloves Industries) has fallen since 3Q22 and this is  expected to drop further in upcoming quarters. However, we see a  muted impact from Rubber Gloves Sector as 1) GMB still hold the  biggest market share in gas distribution segment as the group is the  sole pipeline owner (NGDS) in Peninsular Malaysia and 2) the  declining volume to be offset by the expansion of customers from  consumers product, electrical and electronics and automobiles  sector post economic re-opening. Note that most of GMB’s contract  is for a 3-year period.

As for capex, the group is expected to allocate about RM800mn – RM850mn in RP2 and RM300mn - RM350mn in 2023. The capex  amount is larger than RP1 as 1) some of pipeline project that were  delayed during the Movement Control Order (MCO) to be resumed in RP2, and ii) the allocation for NGDS network expansion and  upgrading. To date, GMB has commissioned 313km of pipeline  network for RP1 period (2020-2022).

FY22’s Earnings Within Expectations

GMB’s 4Q22 revenue soared by 19.2% QoQ and 14.6% YoY to RM2.2bn steered mainly by higher  average natural gas selling price. The price hike offset its lower natural gas volume sold during the  current quarter however which stemmed from the pullback from the Rubber Gloves sector.  Concurrently, FY22 core earnings rose by 56.1% YoY to RM390mn owing to higher gross profit,  finance income, and contribution from the Group’s joint venture companies. On tax expenses, the  effective FY22 tax rate stood at 29.0%, higher than the Malaysian statutory rate due to the impact  of Cukai Makmur of 33%. Overall, the result came within our expectations at 100.5% of our full  year estimate.

Dividend Payout

A second interim DPS of 8.7 sen (ex-date: 03 March and payment date: 31 March) was declared  with a total FY22 DPS of 14.1 sen excluding final dividend (FY21: 17.7 sen including final dividend).  GMB usually pays its dividend three times annually and the group has always maintained its  dividend payment of at least 85% PATAMI (2015-2021). We expect GMB to steadily distribute FY23F-24F DPS, equivalent to a yield of >7%.

Earnings Revision

We slashed our FY23F-24F earnings forecasts by 11%-12%, after incorporating a lower RP2 tariff  revision in gas distribution segments, incoming Malaysia Reference Price (MRP) that is expected  to normalize and headwinds such as the prolonged Ukraine Russian war, inflationary pressure and rising labour cost.

Reiterate BUY with Lower TP of RM3.67

Maintain our BUY call on GMB with a lower TP of RM3.67 (RM3.75 previously) following our  earnings downgrade. Our valuation is pegged at 12.9x PER of FY23F EPS of 28.4sen. We like GMB due to i) its ability to sustain recurring income from pipelines asset amidst market liberalization,  and ii) impressive dividend policy.

Source: BIMB Securities Research - 21 Feb 2023