Gas Malaysia Bhd
(June 18, RM2.53) 
Maintain “hold” with an unchanged target price of RM2.70: Effective Jan 16, the gas tariff mechanism will be based on incentive-based regulation, which will result in better earnings clarity for Gas Malaysia Bhd (GMB) with an estimated margin of RM1.58 per million British thermal units (mmBtu). Liquefied natural gas (LNG) supply is expected to make up approximately 10% of GMB’s gas purchases this year, compared with 4% in 2014. However, GMB will no longer bear the burden of volatile fuel cost as the tariff will be revised every six months, and volume growth will be its key earnings driver going forward.

Management is looking at 7% to 9% gas consumption growth in financial year 2015 (FY15), versus our conservative 5% assumption. We understand gas supply from Petronas Nasional Bhd is not a constraint, given the low utilisation at the Melaka regasification terminal. Currently, GMB is still paying approximately RM50 per mmBtu for the LNG supply, but the second half (2HFY15) LNG price is likely to be lower. The recent tariff hike has also taken into consideration the cost of under-recovery suffered since the fourth quarter (4QFY14), 2HFY15 gas consumption and LNG pricing.

GMB remains committed to its five-year capital expenditure plan, estimated at RM700 million to RM800 million, to boost its existing natural gas distribution system by 36% to widen its reach of industrial customers. 

Meanwhile, its ventures into virtual pipeline (75:25 joint venture [JV] with IEV Energy) and combined heat and power (66:34 JV with Tokyo Gas) could start to contribute in 2HFY16, although it will be minimal. The improved clarity over gas cost will support a robust and sustainable business model going forward. — AllianceDBS Research, June 18

This article first appeared in The Edge Financial Daily, on June 19, 2015.