GAS MALAYSIA BERHAD - 2018

MARC has affirmed its ratings of MARC-1_IS and AAA_IS on Gas Malaysia Berhad’s Islamic Commercial Papers (ICP) programme and Islamic Medium-Term Notes (IMTN) programme with a combined limit of up to RM700 million. The ratings outlook is stable.

The affirmed ratings are mainly driven by Gas Malaysia’s dominant market position in gas distributorship in Peninsular Malaysia, a strong financial profile that supports funding requirement and long-term contracts with Petroliam Nasional Berhad (PETRONAS) that provide high reliability of natural gas supply. The stable outlook incorporates MARC’s expectation that Gas Malaysia’s business and financial risks will remain low over the near term, underpinned by its strong market position in natural gas distribution, healthy revenue and prudent financial management.

Gas Malaysia currently owns and operates a natural gas distribution system (NGDS) network consisting of a 2,272-km pipeline network across Peninsular Malaysia. The wide NGDS network has enabled Gas Malaysia to maintain a near monopolistic position in the distribution and sale of piped natural gas of five mmscfd and below under a licence from the Energy Commission. MARC expects minimal impact on the company from other players who can now sell gas by accessing existing gas infrastructure under a Third Party Access framework, which came into effect on January 1, 2018. Any potential loss in revenue is expected to be moderated by tolling fees imposed on the new players for utilising Gas Malaysia’s pipeline network.

MARC views that the company’s market position in the gas distribution business will remain strong given high entry barriers in the form of sizeable capital requirement for new players to construct a gas infrastructure network. The company has continued to invest in expanding its pipeline coverage, spending RM165.8 million to extend the company’s pipeline network by 57km in 2017.

The rating agency notes that under the Incentive-Based Regulation (IBR) framework, for the first regulatory period (2017-2019), Gas Malaysia has a balance of RM301 million of capital commitment from a total of RM507 million to expand its NGDS network. This is expected to increase its debt from RM289.0 million as at end-June 2018 that could potentially lead to a higher leverage position. Any increase is expected to be moderated by the company’s sizeable cash position; on a net debt-to-equity basis, its leverage stood at 0.11 times as at end-June 2018.

Gas Malaysia’s diversified customer base across different industrial sub-sectors has helped to moderate exposure to economic volatility and mitigate single customer risk. No single customer contributes more than 3% of its total sales with the gas utility’s top five customers collectively accounting for about 10.9% as at end-March 2018. Gas supply risk is mitigated by long-term contracts with PETRONAS expiring in 2022 following which the company has an option to extend the contracts for another five years.

MARC notes that the gas cost pass-through (GCPT) mechanism will ensure Gas Malaysia is financially neutral from the fluctuation of natural gas prices. Gas Malaysia’s revenue increased by 31.0% y-o-y to RM5.3 billion in 2017 on higher selling prices of natural gas and higher consumption from industrial customers. Despite higher revenue, pre-tax profit increased only marginally by 1% y-o-y to RM214.7 million, moderated by higher cost of sales and overhead expenses. Return on assets and return on equity stood at 7.1% and 15.8% (2016: 7.6% and 16.5%). For 1H2018, revenue and pre-tax profit increased by 19.1% y-o-y and 32.5% y-o-y to RM2.9 billion and RM118.5 million.

Cash flow from operations (CFO) has been volatile as changes in gas costs are reflected in subsequent scheduled tariff revisions on a six-month lagged basis. In 2017, CFO declined to negative RM142.4 million from RM482.7 million in 2016. Combined with higher dividend payments of RM165.1 million and higher capex of RM165.8 million, Gas Malaysia’s free cash flow (FCF) declined to negative RM473.3 million from RM237.5 million. During 1H2018, CFO increased to RM267.3 million partly due to the recovery of gas costs from the previous period. As at end-June 2018, cash reserves stood higher at RM399.5 million (2017: RM218.2 million).

Major Rating Factors

Strengths

• Dominant market position in gas distributorship;
• Ownership of pipeline infrastructure for consumers of five mmscfd and below in Peninsular Malaysia;
• Diversified customer base and low collection risk; and
• Shareholders with strong technical and financial background.

Challenge/Risk

• Debt level could increase with capital commitment.