We are initiating coverage on GMB on an OUTPERFORM rating
with a TP of RM2.94/DCF share. There are three simple reasons why we like GMB -
the company is undeniably a growing cash cow with good yields. The expected
fall in its earnings in FY12 is expected to be temporary as the 110MMScfd
additional gas supply deal with Petronas should fuel its FY13-FY15 earnings
growth. In addition, the back-to-back “take-or-pay” agreements with Petronas
and offtakers have capped the risk of its gas off-take not finding buyers. Post-2015,
the proposed Pengerang RGT should be a new growth catalyst for the
company.
A gas company. Gas Malaysia Bhd (GMB) is the only company
licensed under the GSA by the Energy Commission to supply and sell reticulated natural
gas in Peninsular Malaysia up until 1 September 2028. Currently, GMB has
approximately 1,800km of pipelines in operation across Peninsular Malaysia
serving 701 industrial customers, 546 commercial customers and 10,735 residential
customers for natural gas. In the supply of LPG meanwhile, GMB serves one
industrial customer, 1,117 commercial customers and 22,630 residential
customers.
Regulated pricing
mechanism enable earnings certainty. Historically, the movement of GMB’s buying
and selling prices was in line with the movement in the crude oil price and its
related products. However, a regulated pricing mechanism has since been
introduced in Mar 2009. In May 2011, the Government went on to set a fixed
revision of RM3.00/mmbtu every six months starting from 1 Jun 2011 to Dec 2015,
with the profit spread maintained at c.RM2.00/mmbtu. However, there has been no
change in the buying and selling prices after that to date.
New gas from Melaka
RGT to lead growth. With the regulated profit spread, the gas supply availability from
Petronas is the key to its earnings. A New Gas Supply Agreement (NGSA) was
signed with Petronas in Feb 2012 to obtain natural gas supply of up to
492MMScfd effective Jan 2013 for 10+5 years. This is effectively a 29%-increase
in volume from the existing 382MMScfd agreement with Petronas, which will add
100MMScfd over 2013-2015. The additional gas supply is mainly from the Melaka
Re-gasification Terminal (RGT), which will be charged at market price with the
profit spread remaining unchanged at c.RM2.00/mmbtu. All these are based on
back-toback “take-or-pay” agreements with Petronas and its off-takers that minimises
its earnings risk.
Defensive earnings to offer good dividends. FY12 earnings
are expected to come off 33% YoY on the lower revised prices effective Jun 2011.
However, the new gas supply from Melaka RGT should boost FY13-FY14 estimates by
7%-15%. Its cash flows are strong, estimated at RM150m annually, which will
enable GMB to pay at least 75% of its earnings. In addition, GMB is a net cash
company, with the net cash expected to rise to RM462m in FY14 from RM327m in
FY11. This works out to above average net yields of 4%-5% over the next three years. The proposed RGT in Pengerang,
Johor should add new supply thereafter, which will lead GMB earnings growth in
the future.
New coverage with an
OUTPERFORM. We like GMB for its
earnings quality and generous dividend payout. Hence, it offers a rare
investment opportunity for investors look for both growth and income qualities in a stock. We are
initiating coverage on the stock with a OUTPERFORM rating at a price target of
RM2.94/DCF share.
Source: Kenanga
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