News

Yesterday, Gas Malaysia (GASMSIA) announced that the Government has approved the half-yearly natural gas tariff revision for non-power sectors in Peninsular Malaysia to RM21.80/MMbtu (on average) from RM19.77/MMbtu, effective 1 July 2015.

At the same time, GASMSIA also mentioned that the tariff revision is to take into account the price increase in the gas purchased from Petronas. However, it did not mention the new purchase price. Meanwhile, GASMSIA also mentioned that the financial impact from the revised gas tariff is neutral.

Comments

While there is no mention of the new purchase price, we understand that the profit margin spread could be slightly higher than our current assumption of RM1.47/MMbtu but lower than the previous profit margin spread of RM2.02/MMbtu. We also learnt that the margin will be fixed regardless of sales volume. As such, there is a cost pass-through mechanism in place to ensure profit margin spread certainty.

This is definitely positive to GASMSIA as the current structure of total purchase cost is based on a fixed 382MMfcsd volume for regulated gas price and the remaining volume will be based on market price - LNG which is almost triple the price of regulated gas price. As such, GASMSIA’s bottom-line will be negatively affected as sales volume increases as reflected in the 4Q14 & 1Q15 results.

Outlook

With the cost pass-through mechanism in place, earnings visibility from 2H15 onwards is no longer volatile as in the past two quarters. As the new tariff is to kick-start in July, we expect another weak quarter in the upcoming 2Q15.

Although bottom-line will be weakened since the new profit margin spread will be lower than before, top-line is expected to grow further with the new additional 40MMscfd gas supply from the Melaka RGT already started in Jan 2015. This brings total gas supply to 492MMscfd. Changes To

Forecasts

We keep our FY15 estimates unchanged for now, pending clarifications with management. Based on the new profit margin spread, it could lift our estimates by c.4%.

Rating

Maintain UNDERPERFORM

Valuation

Our price target is maintained at RM2.22/DCF share. However, should we based on the new profit margin spread; the fair value could rise to c.RM2.48/DCF share.

We prefer to keep our target price for now pending clarification with management.

Risks to Our Call

A surprise increase in gas supply allocated by Petronas and wider margin spread.

Source: Kenanga Research - 10 Jun 2015