Gas Malaysia Sdn Bhd - 2007

MARC has upgraded Gas Malaysia Sdn Bhd’s (“Gas Malaysia”) long term rating to AAAID from AA+ID and reaffirmed its short term rating at MARC-1ID with respect to its RM200.0 million Al-Murabahah Commercial Papers/Medium Term Notes Programme (“CP/MTN”) and RM500.0 million Al-Murabahah Medium Term Notes Programme (“MTN”). The ratings outlook is stable. The upgrade is based upon Gas Malaysia’s dominant position as the sole natural gas utility in Peninsular Malaysia, supportive regulatory environment, favourable tariff pricing regime, sound operational track record and robust demand for gas. The upgrade also reflects Gas Malaysia’s solid and improving financial profile over the last few years characterised by its high operating profit margins, strong cash flow generation and low debt leverage.

Gas Malaysia is a joint venture comprising MMC Corporation Berhad-Shapadu Corporation Sdn Bhd Consortium (55%), Tokyo Gas-Mitsui Consortium (25%) and Petronas Gas Berhad (20%) with PETRONAS holding one Special Share. The gas utility benefits from a supportive tariff pricing regime which enables it to pass through increases in gas purchase costs to customers, hence imparting stability to Gas Malaysia’s earnings and cash flow. Gas Malaysia has been purchasing gas from PETRONAS at a highly subsidised rate of RM9.40 per million British thermal unit (mmBtu) since October 2002 which is not reflective of market prices that are currently around RM30 per mmBtu. The gas utility’s tariff pricing formula will mitigate its exposure to the long-anticipated revision in gas prices.

In FY2006, Gas Malaysia’s revenue breached the RM1.0 billion mark, with an annual growth of 32.2% year-on-year, largely driven by strong demand from industrial customers which contributed more than 98.0% to the company’s revenues. Profitability measures remain robust and improved during the period under review, with operating profit margin settling at 20.3%, the highest thus far. Supply-side constraints stemming from gas supplier, PETRONAS, continues to constrain the growth in natural gas sales and expansion plans for 2007. For the nine months ended September 2007, revenue and pre-tax profit stood at RM1.0 billion and RM197.8 million respectively whilst operating margin remained stable at 19.7%.

Cash flow coverage measures were at healthy levels while net cash flow from operations (CFO) improved to RM256.5 million in FY2006 (FY2005: RM206.7 million). Going forward, CFO levels are expected to remain comfortable due to moderate capital spending requirements coupled with consistent generation of internal funds from the fixed gas tariffs. The company’s debt to equity ratio is expected to remain low and would be further pared down on account of higher retention of earnings coupled with scheduled repayment of debt. Gas Malaysia retains a high level of financial flexibility, as consistent with its ratings. This is drawn from the strength of its shareholders, substantial operating cash flow generating ability and high cash balances.

The outlook reflects the expectation that Gas Malaysia will exhibit a stable business and financial profile over the medium term. Given the economic attractiveness of gas as a fuel, Gas Malaysia’s margins are expected to remain robust due to the fixed gas tariffs, the cost pass-through mechanism, and the management’s commitment to cost containment.

Major Rating Factors

Strengths

- Stable and predictable income from sales of gas and protected margins on account of pass-through of gas cost from Petroliam Nasional Berhad (PETRONAS) to Gas Malaysia’s end users;
- Strong financial position;
- Favourable regulatory environment; and
- Sole natural gas utility in Peninsular Malaysia.

Challenges/Risks

- Gas supply side constraints posed by its reliance on domestic gas supplier, PETRONAS; and
- Use of imported gas to address supply-side constraints may put downward pressure on margins.