There were no surprises in 1QFY20 earnings of RM47.9m with volume growth rising 4% YoY. We remain positive on its long-term earnings prospects despite an immediate-term hit by MCO-led slowdown in 2QFY20. While awaiting postresult briefing later today on MCO impact, we keep our estimate unchanged for now. It remains MARKET PERFORM with unchanged target price of RM2.50

1QFY20 results in line. At 25% of both house/street’s FY20 estimates, 1QFY20 net profit of RM47.9m came within expectations. However, the impact of Movement Control Order (MCO), which started in the last two weeks of 1QFY20, should be reflected in 2QFY20 results and beyond should the economy slowdown kicked in. There is no interim dividend declared during the quarter as it only pays half-yearly dividend. Meanwhile, on 04 Apr, it declared a final NDPS of 4.5 sen (ex-date: 30 Jun; payment date: 21 Jul) for FY19, totalling full-year FY19 NDPS to 14.1 sen vs. 13.5 sen paid in FY18.

Better sequential results as 4QFY19 was hit by GCPT adjustment. Despite revenue dipping 4% to RM1.61b as sales volume contracted 5% to 49.8m mmbtu from 52.4m mmbtu, 1QFY20 net profit jumped 16% QoQ to RM47.9m from core profit of RM41.1m in 4QFY19, largely due to RM143m in reversal adjustment on Gas Cost Pass-through (GCPT) and thus resulting in lower earnings previously. 4QFY19 core profit was adjusted for a total of c.RM27m one-off gains inclusive of RM21m reinvestment tax allowance and RM5.5m LAD, posted as share of profit at JV for its 66%-owned Gas Malaysia Energy Advance Sdn Bhd (GMEA) turned to share of loss at JV of RM0.2m in 1QFY20 from share of profit of RM22.7m which was due to the c.RM27m one-off gains mentioned above.

Higher sales volume led yearly earnings growth. Although revenue fell 6% from RM1.72b, 1QFY20 net profit leapt 16% YoY from RM41.2m in 1QF19 which was mainly due to 4% rise in sales volume to 49.8m mmbtu from 47.9m mmbtu as margin spread was estimated to maintain at RM1.80/mmbtu-RM2.00/mmbtu range. We also reckon that it could have made some uptick retail margin which was not charged previously. The decline in revenue was largely due to lower average tariff of RM33.71/mmbtu sold in 1QFY20 from RM35.64/mmbtu sold in 1QFY19. Meanwhile, it reported share of loss at JV of RM0.2m in 1QFY20 from share of profit of RM1.8m previously while it registered higher taxation of RM18.6m from RM12.9m in 1QFY19 which was mainly attributed to the under recognition of deferred tax liabilities in FY19.

Long-term volume growth intact despite near-term MCO-led hit. There was a mild impact from the COVID-19-led lockdown in 1QFY20 of two weeks. We believe the duration impact in 2QFY20 is almost half quarter till now, as some of its key off-takers are glove makers (in essential services category) which are operating almost full-stream during this period. Pending post-result briefing later this morning, we keep our FY20-FY21 estimates unchanged with volume growth and spread margin maintained at 3% and RM2.00/mmbtu, respectively.

Keep MARKET PERFORM. While we remain positive on its long-term earnings prospects given the RM1.80-2.00/mmbtu margin spread that will keep its earnings growing on the back of volume growth, we are cautious on near-term impact from the economy slowdown caused by the lockdown. We keep our MP rating and target price of RM2.50 unchanged based on -1SD 5-year PBV of 3.10x which we downgraded in our Utilities Sector Report: Keep It Flowing dated 02 Apr as we believe PBV valuation is more appropriate over earnings-led DCF method in the current depressed business environment. Nonetheless, its DCF value remains at RM3.00. Our recommendation is supported by 4-5% dividend yield. Risk to our call is a faster-than-expected economic recovery.

Source: Kenanga Research - 15 May 2020