Gas Malaysia Sdn Bhd - 2009 Credit Commentary Report

MARC has affirmed its ratings on Gas Malaysia Sdn Bhd’s (Gas Malaysia) RM200 million Commercial Papers/Medium Term Notes (CP/MTN) Programme and RM500 million Medium Term Notes (MTN) Programme at MARC-1ID/AAAID and AAAID respectively. The ratings carry a stable outlook. The ratings are underpinned by Gas Malaysia’s dominant market position as the sole piped natural gas distributor in Peninsular Malaysia, strong demand for piped natural gas and its healthy financial profile. The favourable tariff-setting regime which mitigates the impact of volatile gas prices on Gas Malaysia’s financial performance is a key credit consideration.

Gas Malaysia is owned by MMC Corporation Berhad-Shapadu Corporation Sdn Bhd (55%), Tokyo Gas-Mitsui Consortium (25%) and Petronas Gas Berhad (20%). The national oil company, Petroliam Nasional Berhad (Petronas), holds one special share in Gas Malaysia. The natural gas provider’s long-term gas supply agreement with Petronas mitigates supply risk concerns while the regulated natural gas tariff setting regime allows the company to pass through fluctuations in natural gas cost to its customers. The foregoing arrangements promote earnings and cash flow stability, allowing Gas Malaysia to preserve its favourable financial profile.

Gas Malaysia reported higher revenue in FY2008, with revenue increasing by 35.3% to RM1.88 billion from RM1.39 billion in FY2007, driven by improved sales volume as well as upward revision of natural gas tariffs. Pre-tax profit correspondingly rose to RM356.5 million from RM292.9 million in FY2007. Meanwhile, Gas Malaysia’s operating margin narrowed slightly to 18.80% (FY2007: 21.45%) as a result of the revision in the tariff pricing structure, under which higher gas prices per unit are to be paid for larger volumes of gas consumption. For FY2008, higher earnings and deferred capital spending have enabled the company to record free cash flow of RM220.3 million (FY2007: RM183.2 million) and pare down all its borrowings in FY2008. As at December 11, 2009, there are no amounts outstanding under the rated programmes. MARC views Gas Malaysia’s financial flexibility as strong, in light of its cash balance and unencumbered deposits of RM281.3 million as of end-FY2008 and available borrowing capacity of RM700 million.

That said, the company’s FY2009 profit was pressured by lower gas consumption as a result of declining industrial production amid the challenging economic environment during 1H2009.  Nevertheless, the stable outlook reflects MARC’s expectations that Gas Malaysia will maintain a very low business and financial risk profile over the medium term, underpinned by its healthy revenue growth prospects, regulated profit margin and good operational record.

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