MARC has affirmed the AAAID rating on Gas Malaysia Berhad's (Gas Malaysia) RM500 million Al-Murabahah Medium-Term Notes (MTN) programme with a stable outlook. The rating reflects Gas Malaysia's strong domestic competitive position in natural gas distribution, derived from its status as the only company licensed to supply and sell reticulated natural gas of below 5 mmscfd under long-term contracts in Peninsular Malaysia. The rating factors in the high reliability of gas supply from Gas Malaysia's key shareholder PETRONAS Gas Berhad and its strong financial profile arising from its low leverage and fairly strong liquidity position. The rating also considers Gas Malaysia's weakening profit margins stemming from the steeper pace of increase in gas purchase price relative to selling price.
Gas Malaysia owns and operates the natural gas distribution system (NGDS) comprising 2,065 km of pipelines across Peninsula Malaysia at end-2014 (end-2013: 2,000 km). The NGDS is linked to the Peninsula Gas Utilisation (PGU) system from which natural gas is drawn and piped to end-users. MARC notes that the NGDS has been GAS Malaysia's major capital investment and for which it has earmarked RM700 million to RM800 million over the next five years to extend the pipeline network to 2,800 km. This is expected to support the group's business, which has steadily increased, growing by 6.8% year-on-year (y-o-y) to 147,621 mmbtu in 2014. MARC observes that Gas Malaysia has a fairly diversified customer base across different industrial sub-segments with no single customer contributing to more than 3% to total sales. Accordingly, the group is not exposed to client concentration risk.
Notwithstanding the growth in gas supply volume, Gas Malaysia is a regulated entity whose tariff rates are set by the Energy Commission. Gas Malaysia's natural gas purchase and selling prices were revised upwards in May and November 2014 and again in July 2015. However, the spread between purchasing and selling prices has narrowed with the revisions in 2014 and reduced Gas Malaysia's profit margin (2014: 5.0%; 2013: 7.5%). In addition, the gradual reduction in subsidised gas allocation from the current 382 mmscfd from early-2016 to 300 mmscfd by early 2018 will necessitate purchases at market price, which could potentially further erode Gas Malaysia's profit margins. In 2014, only about 3% of its gas supply was at market price after exceeding its allocated volume.
MARC understands that an incentive-based regulation (IBR) to be implemented in January 2016 is expected to improve Gas Malaysia's pricing transparency. The framework, among others, will take into account capital and operating expenditures with major costs passed on to customers, where the company's profit is based on the weighted average return on assets. The implementation of the framework could provide some degree of earnings stability. For 2014, revenue increased by 19.7% y-o-y to RM2.8 billion on the back of higher gas volumes sold and higher average regulated selling price. However, pre-tax profit declined by 3.5% y-o-y to RM213.1 million as a result of lower margins as well as higher supply costs for purchases at market rates. Cash flow from operations (CFO) in 2014 increased to RM340.1 million (2013: RM202.4 million), due largely to favourable working capital movement. Free cash flow (FCF) improved to RM70.8 million (2013: negative 58.8 million) despite an increase in capital expenditure to RM111.2 million and a sizeable dividend payout of RM158.7 million. MARC notes Gas Malaysia has maintained a significant dividend payout ratio of more than 100% in the last five years except in 2014, which have occasionally resulted in negative FCFs.
For 1H2015, revenue grew 23.7% y-o-y to RM1.56 billion due to increased sales volume and higher prices from the tariff revisions. However, pre-tax profit declined by 31.8% y-o-y due to the reduced margins from the tariff revisions in 2014. MARC observes that Gas Malaysia had previously maintained a highly conservative balance sheet with minimal borrowings. However, starting from 2014, Gas Malaysia began to utilise its MTN programme, drawing down RM70.0 million and a further RM130.0 million in 1H2015. As a result, debt-to-equity rose to 0.21x. Given its modest debt level and strong cash balance, Gas Malaysia has sufficient financial flexibility to meet its capital commitments.
The stable outlook incorporates MARC's expectations that Gas Malaysia's business and financial risks will sustain at the current level. However, a large increase in leverage position and further weakening in profit margins may apply pressure on current ratings and/or outlook.
Contacts: Neoh Jiun Yan, +603-2082 2263/ jiunyan@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.
© Press Release 2015
