Better earnings certainty, but Gas Malaysia still pricey

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Gas Malaysia Bhd
(June 10, RM2.80)
Maintain underperform with unchanged target price of RM2.22:
Gas Malaysia announced on Tuesday that the government has approved the half-yearly natural gas tariff revision for non-power sectors in Peninsular Malaysia to RM21.80 per million British thermal units (MMBtu) on average from RM19.77, effective July 1 this year.

At the same time, Gas Malaysia also mentioned that the tariff revision is to take into account the price increase in the gas purchased from Petroliam Nasional Bhd. However, it did not mention the new purchase price.

Gas Malaysia also mentioned that the financial impact from the revised gas tariff is neutral. While there is no mention of the new purchase price, we understand that the profit margin spread could be slightly higher than our current assumption of RM1.47 per MMBtu but lower than the previous profit margin spread of RM2.02.

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We also learn that the margin will be fixed regardless of sales volume. As such, there is a cost pass-through mechanism in place to ensure profit margin spread certainty. This is definitely positive to Gas Malaysia as the current structure of total purchase cost is based on a fixed 382 million standard cubic feet per day (MMscfd) volume for regulated gas price and the remaining volume will be based on market price — liquefied natural gas (LNG) which is almost triple the regulated gas price.

As such, Gas Malaysia’s bottom line will be negatively affected as sales volume increases as reflected in the results for the fourth quarter of financial year 2014 ended December (4QFY14) and 1QFY15. With the cost pass-through mechanism in place, earnings visibility from the second half of FY15 is no longer as volatile as in the past two quarters.

As the new tariff is to kick-start in July, we expect another weak quarter in the upcoming 2Q. Although bottom line will be weakened since the new profit margin spread will be lower than before, top line is expected to grow further with the new additional 40MMscfd gas supply from the Melaka regasification terminal, already started in January this year. This brings total gas supply to 492MMscfd.

We keep our FY15 estimates unchanged for now, pending clarifications with management. Based on the new profit margin spread, it could lift our estimates by 4%. — Kenanga Research, June 10

Gas-Malaysia

This article first appeared in The Edge Financial Daily, on June 11, 2015.