News  Yesterday, Gas Malaysia (GASMSIA) announced that the Government has approved the natural gas tariff revision for non-power sectors in Peninsular Malaysia to RM19.77/mmbtu (on average), from RM19.32/mmbtu, effective 1 Nov 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 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 first and only revision was implemented in May 2014 With this revision, it shows the government’s commitment to its subsidy rationalisation program.

 To recap, the previous RM19.32/mmbtu selling price was based on blended price of (i) regulated gas price of RM15.55/mmbtu (84% blended); (ii) market price of LNG at RM44.88/mmbtu (16% blended); and, (iii) total gas volume of 155m mmbtu. The c.RM17.31/mmbtu purchase price was based on 6% actual LNG blended.

 Although there is no mention of new purchase price, we believe GASMSIA would still make the same profit margin spread as before. As such, this tariff revision is likely to have no impact to its bottom-line except resulting in higher revenue. In the May 2014 revision, GASMSIA’s margin spread was reduced slightly to RM2.01/mmbtu from RM2.02/mmbtu previously.

 Nonetheless, margin spread could be reduced further should the blended mix for LNG increase from 6% in the previous reference for purchase price of RM17.31/mmbtu. As such, we maintain our opinion that the utilisation rate could be a key determining factor to margin spread as it will affect the usage of LNG since the regulated gas supply is fixed at 382mmscfd.

Outlook  With barely any change in its profit margin spread under the new tariff, 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.

 However, it may not be easy for GASMSIA to sustain profit margin spread going forward given the dynamic of LNG prices. Nonetheless, forward business volume will be supported by the last portion of the 40MMScfd additional gas supply from the Melaka RGT which will be coming on-stream in Jan 2015.

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

Rating Maintain MARKET PERFORM

Valuation  Our price target is maintained at RM3.54/DCF share.

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

Source: Kenanga