We visited and learned first-hand about GASMSIA’s combined heat and power (CHP) plants in Prai last week. Despite their immaterial contributions to group earnings, these CHP plants provide a boost to GASMSIA’s ESG profile given their role in reducing carbon dioxide emission. We maintain our forecasts, TP of RM3.59 and our MARKET PERFORM rating.

We visited GASMSIA’s two CHP plants in Prai, one supplying to Toray Plastics (Malaysia) Sdn Bhd, Penfibre Sdn Bhd and Penfabric Sdn Bhd (Toray cogeneration plant commissioned in Jan 2017 with a power generation capacity of 33MW and steam generation capacity of 130 tonnes per hour or tph), while the other to Fatty Chemical (M) Sdn Bhd (FCM cogeneration plant commissioned in Dec 2023 with a power generation capacity of 6.7MW and steam generation capacity of 35 tph).

The key takeaways from the visits are as follows:

• The CHP business is housed under Gas Malaysia Energy Advance Sdn Bhd (GMEA), a 66:34 joint-venture between GASMSIA and Tokyo Gas Engineering Solutions Co. Ltd. It currently operates three plants with a combined capacity to generate 41.7MW of electricity, 165 tph of steam and 1,684kW of hot water. In FY22A and FY23A, this JV unit contributed 1.5% to group profit after taxation.

• A CHP plant uses gas engine or gas turbine to generate electricity and heat at the same time, powered by a single fuel source. The key benefits of the system are:

1. energy efficiency of 75% (vs. 45% of the single-generation system) as it also captures heat from electricity generation;

2. it reduces carbon dioxide emission by 72,261 tonnes per annum; and

3. c.1 sen per MWh cheaper vs. the industrial tariff charged by TENAGA’s (MP; TP: RM14.50) and it also produces steam.

Conclusion. Despite their immaterial contributions to group earnings, these CHP plants provide a boost to GASMSIA’s ESG profile given their role in reducing carbon dioxide emission.

Forecasts. Maintained.

Valuations. We also maintain our DCF-derived TP of RM3.59 based on unchanged WACC of 6.5% and TG of 2%. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by use (see Page 5).

Investment case. We like GASMSIA for its: (i) strong market position, being a key natural gas retailer in Malaysia, (ii) strong earnings visibility underpinned by its ability to retain customers, typically, via 3-year contract, and (iii) strong free cash flow generation, anchoring a dividend yield of >6%. However, its valuations are fair at the current level. Maintain MARKET PERFORM.

Risks to our recommendation include: (i) regulatory risk, (ii) volatility in margin spread of non-regulated business, and (ii) economic slowdown hurting demand for gas.

Source: Kenanga Research - 15 Jul 2024