CREDIT ANALYSIS REPORT

GAS MALAYSIA DISTRIBUTION SDN BHD - 2021

Report ID 605389038 Popularity 84 views 13 downloads 
Report Date Aug 2021 Product  
Company / Issuer Gas Malaysia Distribution Sdn Bhd Sector Industrial Products - Oil & Gas
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC has affirmed its AAAIS/MARC-1IS 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.

Rationale     
The affirmed ratings are mainly driven by GMD’s near-monopoly position in natural gas distribution arising from its sole ownership of the natural gas distribution system (NGDS) that spans 2,515km as at end-2020 across Peninsular Malaysia along the Peninsular Gas Utilisation (PGU) network. The ratings also factor in GMD’s ability to generate stable revenue under the incentive-based regulation (IBR) framework. GMD’s financial profile is moderated by the increase in borrowings, which could rise further, to part finance capex.

GMD continued to expand its regulated asset base during 2020, but the expansion was below forecast due to movement restrictions amid the COVID-19 pandemic. GMD spent RM171.1 million for expansion which constituted only 89.8% of its planned capex in 2020. While GMD intends to increase capex in 2021 to make up for the missed capex target in 2020, achieving this could be challenging given the ongoing movement restrictions. In the event the actual capex is lower than planned capex in Regulatory Period 1 (RP1: 2020–2022), GMD’s opening regulated asset base in RP2 (2023–2025), which is a factor in determining regulated return, will be lower than projected.

In 2020, GMD recognised revenue of RM415.6 million, consisting of tolling fees of RM384.5 million and under-recovery of revenue of RM31.1 million arising from its entitlement under the IBR framework. The under-recovery was due to lower-than-forecast firm capacity reservation and will be recovered through an upward adjustment of the allowed average distribution tariff to RM2.05 per MMBtu (1Q2020: RM1.88 per MMBtu) between April 1 and December 31, 2021. 

GMD recorded pre-tax profit of RM209.8 million with a strong operating profit margin of 53.6%. It registered strong cash flow from operations (CFO) of RM214.2 million with CFO interest and debt coverages of 16.63x and 0.51x. However, free cash flow (FCF) was negative RM60.9 million mainly due to the capex. Its FCF is expected to remain negative due to continued capex; the shortfall will be financed by borrowings.

GMD’s debt-to-equity (DE) ratio stood at 0.30x as at end-2020 (2019 pro forma: 0.23x). The DE is expected to increase to about 0.44x by 2025.

Rating outlook     
The stable outlook reflects expectations that GMD will maintain its near-monopoly position in gas distribution and will adhere to a disciplined approach to financial management such that its profitability and leverage metrics are commensurate with the current rating band.

Rating trajectory

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

Key strengths
Sole owner of the natural gas distribution system (NGDS)
Near-monopoly position in natural gas distribution
Stable revenue under the established regulated tariff structure
Strong operational track record of NGDS

Key risk
Balancing capital structure vis-à-vis returns


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