Monday, Sep 11, 2017
MARC has affirmed its ratings of MARC-1IS and AAAIS on Gas Malaysia Berhad’s (Gas Malaysia) Islamic Commercial Papers (ICP) programme and Islamic Medium-Term Notes (IMTN) programme with a combined limit of up to RM700 million respectively. The outlook on the ratings is stable. As at end-July 2017, the total outstanding notes under the rated programmes stood at RM161.0 million.
The ratings affirmation is underpinned by Gas Malaysia’s strong domestic competitive position as the sole distributor of up to five million standard cubic feet per day (mmscfd) of natural gas in Peninsular Malaysia, and its strong financial profile characterised by its low leverage and strong liquidity. Gas Malaysia’s market strength also stems from the high reliability of natural gas supply afforded by long-term contracts with PETRONAS Gas Berhad, its key shareholder.
Gas Malaysia currently owns and operates a natural gas distribution system (NGDS) consisting of a 2,186km pipeline network across Peninsular Malaysia. The wide NGDS network, which is linked to the Peninsular Gas Utilisation (PGU) system, has enabled Gas Malaysia to maintain a near monopoly in the distribution and sale of piped natural gas. This market position could come under some pressure with the implementation of the Third Party Access (TPA) framework by the Energy Commission in early 2018 which will introduce qualified players to the gas distribution segment. This would be mitigated by potential gains from fees imposed on the new entrants for use of Gas Malaysia’s pipeline network.
MARC views that the Incentive-Based Regulation (IBR) framework implemented in January 2017 for a three-year regulatory period would translate to stable operating margins as changes in gas price will now be borne by customers through a gas cost pass-through (GCPT) mechanism. Given the fixed tariff rates, Gas Malaysia’s revenue growth, however, can be achieved primarily by increasing its customer base through expanding its pipeline network. In this respect, the company expects to lengthen its pipeline to 2,276km by end-2017. In terms of customer profile, Gas Malaysia has a diversified customer base across different industrial sub-segments with no single customer contributing more than 3% of total sales.
While Gas Malaysia’s long-term contracts with PETRONAS Gas mitigate supply risk, the allocation of subsidised natural gas is being reduced gradually from 322 mmscfd to a capped limit of 300 mmscfd by early 2018. Any gas supplied by PETRONAS above the allocated volume will be priced at market rates although the GCPT mechanism would ensure that Gas Malaysia’s profit margins will be unaffected by changes in gas costs. MARC notes that Gas Malaysia’s licences to supply and sell piped natural gas and liquefied petroleum gas (LPG) in Peninsular Malaysia will expire on September 1, 2028 and December 31, 2020 respectively. License renewal risk is mitigated by the group’s strong operating track record. In the unlikely event that the licences are revoked, the value of Gas Malaysia’s regulated assets of about RM1.1 billion as at end-June 2017 is sufficient to cover the company’s financial obligations.
For 2016, the company recorded a 12.0% y-o-y increase in revenue mainly due to increased demand from industrial customers, as well as tariff revisions which saw an increase in the average selling price of natural gas during the year. Coupled with lower finance cost, pre-tax profit rose by 42.1% y-o-y to RM204.1 million. For 1H2017, revenue and pre-tax profit increased y-o-y by 27.9% and 7.8% to RM2.5 billion and RM96.4 million respectively. Debt-to-equity ratio stood at a low 0.18 times as at end-June 2017. However, Gas Malaysia’s leverage could increase as it seeks to achieve a desired capital structure under the IBR framework, which includes a RM500 million planned capex over the next three years. Cash reserves stood at a healthy RM485.4 million as at end-June 2017; however, a persistently high dividend payout may weigh on its financial metrics.
The stable outlook incorporates MARC’s expectations that Gas Malaysia’s business and financial performance will continue to sustain at current levels. However, any sharp increase in leverage that will result in weaker financial metrics may lead to downward ratings pressure.
Contacts:
Cheah Wan Kin, +603-2717 2932/ wankin@marc.com.my;
Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.