Gas market liberalisation coming
? FY21 core earnings came in above estimates on higher-than-expected gross margin and lower finance cost. A second interim DPS of 6 sen was declared.
? We expect limited earnings impact from gas market liberalisation in FY22F, given Gas Malaysia’s competitive edge in terms of lower gas cost vs. others.
Key results highlights
Gas Malaysia’s FY21 core net profit was above expectations, at 112% of our and 106% of Bloomberg consensus’ full-year estimates, lifted by stronger-than-expected gross margin and lower-than-expected finance cost. FY21 core net profit improved 12% yoy, mainly attributed to higher gas sales volume (+1.5% yoy to 208.7m MMbtu), higher gross margin (+1.5% pts yoy), and revenue cap adjustment (adjusted quarterly since 2Q21), despite a 12% yoy decline in revenue due to lower average natural gas tariff. 4Q21 core earnings dropped 7% yoy, dragged down by lower recognition of revenue cap and lower volume of natural gas sold (-2.2% yoy) in the quarter.
Second interim DPS at 6 sen
A second interim DPS of 6 sen was declared for 4Q21, bringing the DPS declared so far for FY21 to 10.80 sen (FY21 first interim DPS: 4.8 sen, FY20 first and second interim DPS: 9.65 sen). We believe our FY21 DPS forecast of 17 sen (post-earnings revision) based on a dividend payout ratio of 90% is achievable, as its dividend payout ratios in FY15-FY20 were above 90%. Gas Malaysia typically announces its dividends in three tranches, and the final DPS is normally declared in Apr.
Gas market liberalisation
The local gas market is expected to be fully liberalised in 2022 where gas will be traded at market price including gas to the power sector based on a willing-buyer willing-seller basis. This will enable end users to have alternative sources of gas and attract third-party shippers to enter the market. Gas Malaysia renewed the majority of its existing customer contracts at end-2021, with customised tenure and margins. We gather that five shippers have registered with the group to utilise its natural gas distribution system (NGDS) and we see more competition in future for its shipper division to maintain its customer base. Nonetheless, management expects gross margin to be sustainable given its competitive edge in terms of lower gas cost vs. competitors due to its scale of business.
Reiterate Add
We raise our FY22-23F EPS by 4-5% to reflect the higher-than-expected margin. Our TP is revised to RM3.00 as we peg our FY23F EPS to the stock’s 2-year historical mean P/E of 16.2x (previously based on its 1-year historical mean P/E of 16.9x). We are using the two-year historical mean P/E as it reflects Gas Malaysia’s trading range during the implementation of the incentive-based regulation (IBR) period starting 2020. The stock remains an Add, with relatively stable earnings, decent dividends and potential
environmental, social and governance (ESG) rotation play as re-rating catalysts.