News  Last Friday, Gas Malaysia (GASMSIA) announced that the Government has approved the natural gas tariff revision for non-power sectors in Peninsular Malaysia to RM19.32/mmbtu on average, from RM16.07/mmbtu previously, effective 1 May 2014.

 At the same time, GASMSIA also mentioned that the gas purchase price from Petronas will be adjusted upwards accordingly, which shall take into account the prices of domestic (regulated) natural gas and the LNG. However, it did not mention the new purchase price.

Comments  This is the first tariff revision since June 2011, when the Government had in May 2011 set a timeframe for a fixed revision of RM3.00/mmbtu for every six months. However, the selling price at RM16.07/mmbtu has been left unrevised while the new tariff price of RM19.32/mmbtu is RM0.20/mmbtu higher than the RM19.12/mmbtu that was supposed to be implemented in Dec 2011.

 As the purchase price is not known, the profit margin spread is uncertain for now. If based on the regulated pricing fixed in May 2011, the new purchase price would be RM17.05/mmbtu, implying a profit margin spread of RM2.27/mmbtu. If this is the case, it is definitely positive to GAMSIA as it could make an extra RM0.25/mmbtu profit as the current spread is only RM2.02/mmbtu.

 However, the new selling price of RM19.32/mmbtu may not be good enough for GASMSIA to maintain its profit margin, unless the LNG is at a subsidised price.

 Basing on TENAGA (OP; TP: RM12.33)’s scenario where the LNG is being fixed at RM41.68/mmbtu; assuming the purchase price is to be maintained at RM14.05/mmbtu with 100% utilisation of the current 452MMscfd gas supply, the profit margin spread would be reduced to RM0.99/mmbtu. It would turn into a loss of RM1.54/mmbtu should the purchase price increase to RM17.05/mmbtu. The situation would get worse next year when the gas supply increases to 492MMscfd.

Outlook  FY14 is expected to be another strong year with full-year earnings impact from the 40MMScfd gas supply which started from July 2013 and another new additional 30MMScfd commencing Jan 2014 from the Melaka RGT. The last portion of the 40MMScfd additional gas supply from the same RGT will be coming on-stream in Jan 2015, which will ensure consistent earnings growth in the future.

Changes To Forecasts We keep our FY14-FY15 estimates unchanged for now, pending clarification with management later.

Rating MAINTAIN UNDERFORM

Valuation  Price target maintained at RM3.41/DCF share.

Risks to Our Call A surprise increase in gas supply allocated by Petronas and wider margin spread.

Source: Kenanga