News

The Government has announced that the implementation of Incentive-based Regulation (IBR) Framework by GASMSIA will take effect from 1 Jan 2016.

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. GASMSIA has made sufficient preparations to ensure a smooth transition to this new regulatory framework.

Comments

This is not unexpected as the management had made widely known to the market in June that the authorities were agreeable to an IBR framework to take effect from Jan 2016 with a review for every six months, similar to that of TENAGA (MP; TP: RM12.87), in setting the pricing mechanism guided by a fixed profit margin spread of RM1.58/mmbtu. (refer to our update “A Volume Game” dated 18 Jun 2015)

We maintain our positive stance on the IBR framework as any price hike in piped gas or LNG will have neutral impact to GASMSIA based on this mechanism which will be cost past-through in natural. Thus going forward, earnings growth will be volume driven.

Outlook

With the profit margin spread being fixed at RM1.58/mmbtu, earnings visibility is expected to be high as opposed to the 4Q14-1Q15 period where earnings were hit by margin compression as business volume increased which meant that the expensive LNG component increased.

Meanwhile, the 5-year RM700m-RM800m capex on pipeline expansion shows that GASMSIA is confident of securing additional new gas supply from its current 492mmscfd guaranteed supply from Petronas. This could be a new earnings catalyst.

Forecast

We maintain our FY15-FY16 forecasts for now.

Rating

Maintain OUTPERFORM

Valuation

Our price target is maintained at RM2.68/DCF share.

Risks to Our Call

A sudden change in cost-pass through mechanism with downward revising in margin spread.

Source: Kenanga Research - 23 Oct 2015