Gas Malaysia Berhad (GMB) yesterday announced that the implementation of IBR (Incentive-Based Regulation) will take effect from 1 January 2016. With the IBR implementation, Gas Malaysia will be financially neutral with respect to gas costs going forward. With respect to its implementation, the IBR shall first be on a Trial Run Period in 2016, following which, the First Regulatory Period will run for the next three years from 2017 until 2019. GMB said it has made sufficient preparation to ensure a smooth transition to this new regulatory framework. (Source: Bursa Malaysia)

Comments: We are neutral on the official announcement on the implementation of the IBR, given management’s earlier guidance. Nonetheless, we caution that the gas-tariff adjustments under the IBR are not automatic and are subject to final approval from the Energy Commission. Under the IBR, GMB should be allowed to adjust gas tariffs every 6 months so that it is financially neutral with respect to changes in gas costs. At this juncture, we have a BUY rating and TP of RM2.58 on GMB, although we note that the share price has recovered substantially.

Source: Affin Hwang Capital Research - 23 Oct 2015