Rating action     
MARC Ratings has affirmed its AAA_IS /MARC-1_IS ratings on Gas Malaysia Distribution Sdn Bhd’s (GMD) Islamic Medium-Term Notes (IMTN) programme and Islamic Commercial Papers (ICP) programme with a combined limit of up to RM1.0 billion. The ratings outlook is stable. The outstanding amount under the programmes stood at RM331.0 million as at end-July 2022. 

Rationale     
The affirmed ratings are mainly driven by GMD’s strength as the sole owner of the NGDS that spans 2,621km as at end-2021 across Peninsular Malaysia along the Peninsular Gas Utilisation (PGU) network. The ratings also factor in GMD’s predictable revenue under the incentive-based regulation (IBR) framework, which allows GMD to recover shortfalls, if any, in annual tolling fee from forecast through tariff adjustment. 

GMD registered total revenue of RM440.2 million in 2021, which includes a RM48.7 million under-recovery amount as its tolling fee of RM391.5 million was lower than forecast. GMD’s distribution tariff for January-December 2022 is maintained at RM1.715/GJ/day to allow it to continue recovering the shortfall in tolling fee; the distribution tariff was last revised from RM1.573/GJ/day in April 2021. We understand that based on secured firm capacity reservation for 2022, GMD is expected to achieve the regulated revenue approved by the Energy Commission for the year.

In 2021, GMD spent RM229.8 million mainly for 106km of NGDS expansion mostly in Kinta Valley in Perak, Lukut in Negeri Sembilan, and Sungai Choh in Selangor. GMD has utilised 60.1% of the RM675.1 million planned capex for Regulatory Period 1 (RP1: 2020-2022) as at end-2021. The remaining planned capex will be utilised to fund pipeline expansion of 120km in 2022. In the event the actual capex is lower than planned capex in RP1, GMD’s opening regulated asset base in RP2 (2023–2025), which is a factor in determining regulated return, will be lower than projected. The proposal for RP2’s annual revenue requirement is currently being reviewed by the Energy Commission.

GMD registered pre-tax profit of RM222.0 million in 2021 with a strong operating profit margin of 52.6%. Cash flow from operations (CFO) stood at RM220.2 million with healthy CFO interest and debt coverages of 21.01x and 0.63x. Free cash flow (FCF) remained negative due to capex and sizeable dividend payment with a dividend payout ratio of 92%. As a result, cash balance declined to RM55.9 million (2020: RM152.8 million). 

Debt-to-equity (DE) ratio stood lower at 0.24x (2020: 0.30x) as the company pared down its borrowings while capex was mainly financed by internal funds. Going forward, GMD expects to utilise the sukuk proceeds to fund capex. The company projects its DE to increase to 0.44x by 2025 to optimise its capital structure in line with the IBR framework. 

Rating outlook     
The stable outlook reflects MARC Rating’s expectations that GMD will maintain its sole ownership of the NGDS and will adhere to a disciplined approach to financial management such that its profitability and leverage metrics remain commensurate with the current rating band.

Rating trajectory     

Downward scenario     

Ratings pressure will be triggered by sharp increases in leverage position beyond the current forecast, and/or weakening cash flow or liquidity position.