GAS MALAYSIA BERHAD - 2019

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 RM700.0 million. The ratings outlook is stable. The outstanding under the MTN programme was RM281 million as at end-September 2019.

The ratings affirmation is driven by Gas Malaysia’s dominant market position in gas distributorship in Peninsular Malaysia and its strong financial profile, characterised by strong liquidity and a low leveraged position.

The stable outlook reflects MARC’s expectation that the impending gas distribution industry liberalisation will not materially impact the group’s business and financial risks. Nonetheless, the rating agency will undertake a full assessment of the group as it undertakes corporate restructuring in response to the liberalisation.

Gas Malaysia owns and operates a natural gas distribution system (NGDS) consisting of a 2,450-km pipeline network across Peninsular Malaysia as at end-June 2019. The extensive NGDS network has enabled Gas Malaysia to maintain a near monopoly in the distribution and sale of piped natural gas of five million standard cubic feet per day (mmscfd) and below under a licence from the Energy Commission (EC). MARC notes Gas Malaysia’s competitive advantage in the gas distribution business remains strong given high entry barriers in the form of sizeable capital requirement for new players to construct a gas infrastructure network. This notwithstanding, under the Third Party Access (TPA) framework, other players (gas shippers) can access the existing gas infrastructure to sell gas to end-users. MARC, however, expects minimal impact on the group from the entry of new players as any potential losses in revenue and market share are expected to be moderated by tolling fees imposed on the new players for utilising the NGDS.

MARC notes that once the first regulatory period (2017-2019) (RP0) under the Incentive-Based Regulation (IBR) framework ends in December 2019, some changes to the tariff structure will be incorporated in the new regulatory period 2020-2022 (RP1). The changes will be carried out to reflect separation of the gas distribution and shipping businesses. Under the new tariff structure, tariff for gas distribution facility utilisation or tolling fees will be regulated under the IBR while shipping fees will be determined by market forces. The tariff for gas distribution, which has yet to be determined by the EC as of to date, will reflect the operating costs and a fair return for the gas distributor.

As at end-June 2019, Gas Malaysia has committed RM498.9 million of the total capital commitment of RM507.0 million for RP0. The capex was largely funded by debt; as a result debt-to-equity (DE) ratio rose to 0.28x as at end-June 2019 (net DE:0.07x). Gas Malaysia is expected to spend between RM150.0 million and RM200.0 million annually during RP1 (2020-2022). The leverage ratio is expected to increase to 0.5x over the next five years. The company is currently expanding its pipeline network in the northern region of Peninsular Malaysia, mainly in Kinta Valley, Perak, and expects to add 147.7km by end-2019.

The current gas supply agreement with PETRONAS expires in 2022 with an option to extend for another five years. MARC understands that Gas Malaysia will start negotiations with PETRONAS soon for the renewal of the supply contract. Given the importance of Gas Malaysia as the main supplier of natural gas to industrial customers using five mmscfd and below, MARC expects the company to be able to secure sufficient gas supply to meet the demand.

Gas Malaysia’s revenue increased by 17.3% y-o-y to RM6.2 billion in 2018 on higher selling prices of natural gas and higher consumption from industrial customers. Coupled with lower administration expenses, pre-tax profit rose by 9.0% y-o-y to RM234.1 million. Cash flow from operations (CFO) continued to be volatile as changes in gas costs were reflected in subsequent scheduled tariff revisions on a six-month lagged basis. In 1H2019, Gas Malaysia has incurred a negative CFO given the higher actual gas costs. Funds from operations before changes in working capital remained above RM250.0 million since the beginning of RP0. Cash reserves stood healthy at RM208.4 million as at end-June 2019. However, a persistently high dividend payout may weigh on the company’s financial metrics.

Major Rating Factors

Strengths

• Dominant market position in gas distributorship;
• Diversified customer base and low collection risk; and
• Shareholders with strong technical and financial backgrounds.

Challenges/Risks

• Industry liberalisation will increase competition in gas shipping business; and
• Debt level could increase with capital commitment.