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 outlook is stable. As at end-December 2023, the outstanding amount under the programmes stood at RM330.2 million.

The ratings reflect GMD’s strong market position in natural gas distribution and the predictable earnings and cash flow under the Incentive-Based Regulation (IBR) framework, which secures its approved annual revenue requirement (ARR) through tariff adjustments. Revenue comprises tolling fee from natural gas distribution through the NGDS.   

In 2023, GMD recorded a tolling fee of RM402.3 million, RM30.3 million lower than its ARR for the year. This difference would be recovered through tariff adjustments in the coming year. Reflecting the regulated nature of its revenue, GMD has been able to maintain its operating margin at a strong 53.1% in 2023, consistent with previous years. 

For 2024, GMD expects tolling fee to remain below its ARR based on lower firm capacity reservation from glove manufacturers, with the industry still facing stiff competition from China. This is expected to be recovered through a distribution tariff surcharge in 2025. 

GMD utilised RM215.2 million of its regulated capex in 2023, mainly on NGDS expansion. This was lower than the RM348.2 million forecast, mainly due to logistical challenges that had hindered procurement. The rating agency understands that sufficient pipeline stock has now been obtained for the remainder of regulatory period two (RP2) (2023-2025), and GMD anticipates being able to meet its remaining projected capex of over RM600.0 million for 2024 and 2025. This would enable it to catch up with and meet its initial RP2 capex goal.

While total borrowings are likely to increase moderately to part fund capex, GMD’s capital structure is expected to remain conservative, with a debt-to-equity (DE) ratio of 0.25x (end-RP2 target: 0.3x).

The stable outlook reflects MARC Ratings’ expectations that GMD will maintain its sole ownership of the NGDS. The rating agency also expects the company to adhere to a disciplined approach to financial management, including a prudent dividend policy.

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