Good earnings visibility and volume growth -GASM

by **Cals** Tue 06 Aug 2013, 10:07

Good earnings visibility and volume growth
Business & Markets 2013
Written by Affin IB Research
Tuesday, 06 August 2013 09:50

[b style="line-height: 18px;"]Gas Malaysia Bhd [/b]
(Aug 5, RM3.41)
Maintain add at RM3.39 with a target price of RM3.50: The stock has outperformed the KLCI by 26% year-to-date (YTD) driven by good earnings visibility, volume growth (as depicted by its first half of 2013 financial year ending Dec 31 [1HFY13] core net profit growth of 12.9% year-on-year [y-o-y]) and stable cash flows.
Stepping forward, we project a three-year earnings compound annual growth rate (CAGR) (FY12 to FY15) of 9.5% driven by encouraging capacity bookings (by customers).
We note that management has already signed off the additional bookings for FY13 (40 mmscfd) and FY14 (30 mmscfd) to new and existing customers. For now, management is working at securing additional gas volume supply from Petroliam Nasional Bhd (Petronas) to grow its earnings towards FY16 to FY18.
We expect Gas Malaysia’s FY13 and FY14’s revenue growth (average: +11.7% y-o-y) to outpace Malaysia’s annual GDP growth of around 5% to 6% per annum.
The group chalked up a 2QFY13 core net profit of RM45 million (+10.1% y-o-y; +9.3% quarter-on-quarter [q-o-q]), thanks to higher capacity bookings by customers.
Y-o-y, earnings growth was driven by higher gas volume allocation to Gas Malaysia and back-to-back capacity bookings. Collectively, the group reported a 1HFY13 core net profit of RM85.1 million, representing a 12.9% y-o-y growth underpinned by a 13% y-o-y increase in gas volumes. Accounting for 47% and 48% of our and street estimates, we deem the results to be in line with expectations.
As the stock is poised to deliver robust earnings growth over FY13-FY14, we have used a two-stage dividend discount model (to capture the next three years’ earnings growth potential).
We have an “add” rating with a DDM-based target price of RM3.50 (discount rate 8%; two-year dividend growth of 10%; long term dividend growth of 3%).
At our fair value, the stock would trade at 22.7 times FY14 earnings per share and yields would be compressed to 4.4%. In arriving at our target price, we assume a 100% dividend payout over FY13 to FY15 predicated on Gas Malaysia’s strong balance sheet, good earnings visibility and low capital expenditure requirements.
The group declared an interim net dividend per share (DPS) of 6 sen in its 2QFY13 results and we continue to hold out for a 14.1 sen net DPS for FY13 (net yield of 4.4%). Further share price outperformance from hereon is unlikely given the expectations of higher interest rates into 2014. — Affin IB Research, Aug 5

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This article first appeared in The Edge Financial Daily, on August 06, 2013.