Gas Malaysia Berhad - 2014

MARC has affirmed the AAAID rating on Gas Malaysia Berhad’s (Gas Malaysia) RM500 million Al-Murabahah Medium-Term Notes (MTN) programme with a stable outlook. The rating incorporates Gas Malaysia’s strong competitive position in natural gas distribution in Peninsular Malaysia, stemming largely from reliable supply of natural gas from national oil and gas company Petroliam Nasional Berhad (PETRONAS) under long-term contracts. Additionally, the rating considers the company’s very strong financial profile and ample liquidity. These positive factors notwithstanding, MARC acknowledges the potential impact from any regulatory changes to the tariff structure of natural gas pricing and to the allocation of subsidised natural gas volumes on the company’s credit profile.

Gas Malaysia is the sole distributor of piped natural gas to the non-power sector for users consuming 5 million standard cubic feet per day (mmscfd) and below in Peninsular Malaysia under a 30-year license agreement expiring in September 2028. The company’s major capital investment has been in gas pipeline network system that has steadily expanded in Peninsular Malaysia, adding 200 km in 2013 to its total length of 2,000 km. The network, which is connected to the Peninsular Gas Utilisation (PGU) system, enables natural gas to be supplied to industrial, commercial and residential users. Despite increasing sales volumes, Gas Malaysia’s profitability has remained flat due largely to the regulated selling and purchase price of piped natural gas.

MARC also notes the recent 9.6% increase in revised regulated purchase price of piped natural gas against a 2.3% rise in average selling price with effect from November 1, 2014 from previous levels set in May 2014 will moderate profit margin. In addition, Gas Malaysia’s profit margins could also be weighed down if its subsidised gas allocation is reduced to 300 mmscfd from 382 mmscfd currently. MARC understands that the company is still negotiating with the relevant authority on the scheduled reduction of the subsidised gas allocation. Although gas supply risk is mitigated by the long-term gas supply agreement with PETRONAS for up to 492 mmscfd, purchases exceeding the allocated subsidised volume of 382 mmscfd is at market price. However, the impact on profitability posed by lower subsidised volume and higher purchased price would reduce should increases in average selling price be allowed under the government’s subsidy rationalisation programme.
 
For the first nine months of 2014 (9M2014), Gas Malaysia’s revenue and pre-tax profit increased by 16.3% year-on-year (y-o-y) to RM1,993.0 million (9M2013: RM1,713.0 million) and 11.0% y-o-y to RM188.8 million (9M2013: RM170.1 million)  respectively due  to  higher sales  volume  and  an  increased  pricing structure in May 2014. Gas Malaysia’s financial profile and overall credit quality will hinge on its continued ability to mitigate its exposure to an unrecoverable increase in natural gas procurement costs and to sufficiently recover the costs of its capital investments in gas pipeline expansions through adequate tariff levels.

Cash flow from operations increased to RM230.4 million in 9M2014 (9M2013: RM151.0 million). Free cash flow, however, remained negative at RM5.5 million attributed to higher capital spending and dividend payments. As at end-September 2014, Gas Malaysia’s capital commitment to expand its gas pipeline network increased to RM190.8 million, a sharp increase from its historical capex levels of around RM130 million. However, its healthy cash and cash equivalents of RM291.0 million and zero debt burden in 9M2014 provides comfortable headroom for the increased capital expenditure. MARC also continues to view Gas Malaysia’s liquidity position as strong given the healthy cash balance levels.