Gas Malaysia Berhad IPO Target Price 2012

Gas Malaysia Berhad (Subscribe) - Safe and stable
Fair Value: RM2.61

Investment Highlight

• Stable earnings from its monopolistic business model. Gas Malaysia is the only company licensed under the Gas Supply Act by the Energy Commission to sell, market and distribute natural gas in Peninsular Malaysia besides government-owned Petronas Gas Berhad.
• Attractive dividend payout. Gas Malaysia is committed to reward the shareholders with a dividend payout ratio of 100% in 2012F and a minimum of 75% payout in subsequent years onward. This translates into a decent dividend yield of 5.5% and 5.4% for 2012F and 2013F respectively. We believe the Group shall not have any difficulty of declaring even higher dividend of more than 75% payout in view of its current net cash of RM227m or net cash per share of 18 sen (zero gearing) and lower capex expected in 2013F onwards (estimated RM40m p.a., significantly down from 2012F’s capex of RM140m).
• Growing demand of natural gas in Malaysia. Natural gas is being viewed as an efficient energy source compared to other common fuel such as LPG, coal and diesel as it provides more energy output per weight and is also considered as a cleaner fuel. More importantly, it is one of the cheapest energy sources which is gaining popularity in the industrial usage as it provides competitive cost advantage to the users in view of rising energy prices.
• Wide strategic pipeline coverage throughout Peninsular Malaysia. Gas Malaysia has built approximately 1,800km of underground pipelines throughout Peninsular Malaysia in order to deliver gas to its industrial, commercial and residential customers. Furthermore, the Group is able to further extend its coverage to other growing industrial areas efficiently without incurring heavy capital expenditure.
• New source of gas supply to meet rising demand. Petronas has developed the Malaysia’s first LNG import terminal in Melaka. Thus, the shortage of gas supply since 2007 will be met by the commencement of Melaka regasification plant which is expected to be ready in Sept 2012.
•  Reaching a wider customer base. Gas Malaysia principally market and distribute natural gas to customers in Peninsular Malaysia initially consuming less than two MMScfd and below of natural gas. However, the Group is able to ink a new gas supply agreement to increase its supply to five MMScfd with effect from Jan 2013.
• Strategic shareholder. Petronas Gas Berhad, which is also the sole supplier of natural gas for the Group, is holding 14.8% of Gas Malaysia’s stake upon listing. By having such a strong strategic relationship with its supplier, we believe Gas Malaysia is able to reduce its risk of dependency on supply of natural gas.

Valuation & Recommendation

• Subscribe with a target price of RM2.61. Our non-rated target price is based on DCF valuation method (with discount rate of 9.7% and terminal growth rate of 2%) which indicates implied yield of 4.7% and 4.6% for 2012F and 2013F respectively or implied 2012F PER of 21.4x and 2013F PER of 16.5x. Our valuation also implies 20% discount to its peer, Petronas Gas’ 2013F consensus PE of 20.5x.
• Our fair value represents 19% upside to indicative IPO price of RM2.20. The listing of Gas Malaysia shall provide a safe investment opportunity for investors under current market uncertainty.

Source: JF Apex Research - 23 May 2012