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Gas Malaysia’s 1Q16 net profit, which rose 10% on-year to RM31mil (US$8mil), was at 29% of CIMB Equities Research’s full-year forecast and 24% of consensus.
The research house said on Thursday the higher earnings were due to lower tax rate and lower losses from its joint venture. Its tax rate fell from 25% in 1Q15 to 21% during the quarter as it reversed some of its deferred tax liabilities.
“We gather from the company that its tax rates should normalise closer to the statutory rate of 24% in the coming quarters. As for the joint venture, its losses narrowed from RM1.7mil in 1Q15 to RM100,000 in 1Q16. We believe this was due to lower start-up cost during the quarter,” it said.
CIMB Research raised its FY16-18F EPS by 1%-4% to reflect the lower tax rate. However, it maintained its sum-of-parts based target price of RM1.80, which is 21.7% below the last traded price of RM2.30, and also its reduce call due to its expensive valuation.
“We prefer Tenaga for its lower price-to-earnings (P/E) and more exciting earnings growth prospects,” it said.
The incentive-based regulation (IBR) that regulates Gas Malaysia’s tariff and earnings was implemented on Jan 1, 2016. 1Q16 results are the first set of quarterly results reported by Gas Malaysia under the IBR.
To recap, Gas Malaysia had previously revealed that the allowable WACC for its pipeline assets was set at 8% under the IBR, though it was still consulting with the regulator for a higher rate of return. CIMB Research assumed an allowable WACC of 8% in its earnings forecasts.
“Although Gas Malaysia’s 1Q16 earnings beat our expectation, we are keeping our assumption as the outperformance was due mainly to the lower tax rate. Gas Malaysia’s 1Q16 EBITDA met our expectation as it accounted for 26% of our full-year forecast,” it said.
CIMB Research also said there is no guarantee that Gas Malaysia will be allowed to earn the retail margin. A
lower-than-expected margin approved, if at all, may de-rate the stock. Also, Gas Malaysia trades at 26 times CY16F P/E, higher than PetGas’s 23 times and Tenaga’s 11 times.
“The latter two, especially Tenaga (Add, TP: RM16.40), provide cheaper exposure to the utilities sector. For exposure to the gas infrastructure sector, we prefer PetGas (Hold, TP: RM22.30) for its stronger earnings resiliency,” it said.
