Gas Malaysia fair value by kenanga

Gas Malaysia, which is en route for a Main Market listing on Bursa Malaysia on 11 Jun 2012, is the only company licensed under the GSA by the authority to supply and sell reticulated natural gas in Peninsular Malaysia. Earnings certainty for Gas Malaysia is fairly high given that the buying and selling of gas (under the GSA) are regulated by a pricing mechanism which also spells out the margin spread. We value the company at RM2.42/share, based on required 5% net yield. This implies 20.5x PER of CY13 earnings, which is also fairly in line with the valuation of Petronas Gas. Netting off its net cash, it could potentially be valued at RM2.60/share, assuming the targeted PER of 20.5x remains unchanged. Gas Malaysia is more than a dividend play, given its earnings certainty with a low yearly capex requirement. At the offer price of RM2.20, it offers net yield of 5.5%. Coupled with the potential upside to RM2.42/60, the stock offers >15% in total return. 

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 relation to the supply of 
LPG, GMB serves one industrial customer, 1,117 commercial customers and 
22,630 residential customers. 
Prices are set for the next 4 years.  Historically, the movement of the 
buying and selling prices was in line with the movement in the crude oil 
price and its products. However, since the Government regulated the buying 
and selling price at RM17.99/mmbtu and RM22.06/mmbtu respectively in 
Aug 2008, the prices were revised in Mar 2009 and thereafter set to be 
reviewed every half-yearly from 1 Jun 2011 onwards. In May 2011 in fact, 
the Government has set a fixed revision of RM3.00/mmbtu every six months 
starting from 1 Jun 2011 to Dec 2015. 
Defensive earnings supported by pricing mechanism.  Earnings are 
expected to decline over the years  till 2015 due to the regulated pricing 
mechanism where the margin spread  will narrow over time. We project 
FY12 net profit to contract to RM151m from RM229m in FY11. This will 
further drop to RM146m in FY13 before touching RM136m in FY14m despite 
the top line growing at 20%-40% a year. Our buying and selling prices 
assumptions are based on the regulated pricing mechanism with volume 
growth of 4%-5% over the period. We have also factored in a RM135m 
capex for FY12 and RM40m each for FY13-FY14. Going forward, the annual 
capex should be maintained at RM40m if there are no major expansions.  
Strong net cash will enable high dividend payouts.  Although 
expecting lower earnings, GMB is expected to pay out 100% of its earnings, 
which will translate into an attractive net yield of 5%-6% for FY12-FY14. Its 
earnings quality and dividend payouts are sustainable given the pricing 
mechanism. Assuming the buying and selling prices of gas are to stay from 
2015 onwards, its dividend is expected to be higher. In addition, GMB boasts 
a strong balance sheet with a net cash position of RM327m in FY11. The net 
cash level is set to drop to RM240m in FY12 on the back of a higher capex 
of RM135m before increasing again to RM286m by FY14.