Gas Malaysia Bhd
(Oct 30, RM3.50)
Maintain “market perform” with target price of RM3.54 over discounted cash flow (DCF) per share: Yesterday, Gas Malaysia Bhd announced that the government had approved the natural gas tariff revision for non-power sectors in Peninsular Malaysia to RM19.77 per one million British thermal units (mbtu) on average, from RM19.32 per mbtu, effective Nov 1, 2014.
Gas Malaysia said the gas purchase price from Petronas will be adjusted upwards accordingly, after taking into account the prices of domestic (regulated) natural gas and liquefied natural gas (LNG). However, it did not mention the new purchase price.
The tariff revision is on schedule for the first time since the government set a timeframe for a half-yearly tariff revision in May 2011. Since then, the only revision was carried out in May 2014.
The latest revision shows the government’s commitment to its subsidy rationalisation programme.
The previous RM19.32 per mbtu selling price was based on blended price of regulated gas price of RM15.55 per mbtu (84% blended), market price of LNG at RM44.88 per mbtu (16% blended) and total gas volume of 155 million mbtu.
The rate of RM17.31 per mbtu purchase price was based on 6% of actual blended LNG.
Although the new purchase price has not been revealed, we believe Gas Malaysia will still make the same profit margin spread as before.
As such, this tariff revision is likely to have no impact on its bottom line except for increasing revenue.
In the May 2014 revision, Gas Malaysia’s margin spread was reduced slightly to RM2.01 per mbtu from RM2.02 per mbtu previously.
Nonetheless, margin spread could be reduced further should the blended mix for LNG increase to more than 6%. As such, we believe the utilisation rate could be a key determining factor in margin spread as it will affect the usage of LNG since the regulated gas supply is fixed at 382 million standard cubic feet per day (mmscfd).
With barely any change in its profit margin spread under the new tariff, financial year 2014 (FY14) is expected to be another strong year, with full-year earnings impact from the 40 mmscfd gas supply from July 2013 and additional 30 mmscfd from January 2014 from the Malacca Re-gasification Terminal (RGT).
However, it may not be easy for Gas Malaysia to sustain its profit margin spread going forward given the dynamic of LNG prices.
Still, forward business volume will be supported by the last portion of the 40 mmscfd additional gas supply from the Malacca RGT. — Kenanga Research, Oct 30
This article first appeared in The Edge Financial Daily, on October 31, 2014.