Energy Commission has revealed the second part of the RP1 regarding GASMSIA operations which will see revenue stream bifurcating into shipper and distribution systems. Share price has been under pressure of late over concerns of lower earnings under the RP1 regime. However, we believe market has over-reacted as the impact is immaterial given the smaller base of RAB of RM1.9b. As such, we upgrade the stock to OP with unchanged TP of RM3.00.

RP1 base tariff for distribution revealed. On Tuesday, GASMSIA announced that the government through Energy Commission (EC) has approved the average base tariff of RM1.573/GJ in Regulator Period 1 (RP1) over 2020-2022 for the utilisation of the natural gas distribution system of GASMSIA’s wholly-owned subsidiary Gas Malaysia Distribution Sdn Bhd (GMD). In addition, the government also approved a surcharge of RM0.520/GJ to average base tariff for 2020-2021. This completed the RP1 announcement following the earlier announcement of average natural gas selling price of RM33.65/mmbtu for 2020, which is lower by 2.91% or RM1.01/mmbtu from RM34.66/mmbtu currently, on 6 Dec, for the distribution segment by its wholly-owned Gas Malaysia Energy & Services Sdn Bhd (GMES).

Revenue recognition bifurcates into two. Effectively from RP1, GASMSIA will be an investment holding company with earnings derived from GMD and GMES. GMD will charge shipper like GMES and other 3rd party shippers for utilising its distribution system, i.e., pipelines, of tolling fee which is the base tariff of RM1.573/GJ plus surcharge or rebate if any, whereas GMES, being a shipper will sell gas to off-taker at RM33.65/mmbtu to make a margin spread plus a retail margin which is not made known yet and tolling fee will be part of its operating cost. As such, for financial consolidation at GASMSIA level, we believe RM33.65/mmbtu will be the ultimate revenue recognition as the tolling fee of RM1.573/GJ will be eliminated for inter-segment revenue. Any uptick from this will be 3rd party shippers that utilise GMD’s distribution system.

Profit margin to remain the same. Although there is no official disclosure, a 3-year capex of RM650m-RM700m and 5%-6% volume growth assumption for GMD’s distribution system are embedded in RP1 return calculation. RAB return rate is also not officially disclosed, we have learnt that it will be between 7.3% and 7.5% which means slightly lower than current return of 7.5%. And, based on its RAB of RM1.9b as at FY18, a 0.1%-0.2% reduction in return rate will not have any material impact to earnings, amounting to RM1.9m-RM3.8m p.a. As such, volume growth is vital to its bottom-line as a 0.1%-0.2% reduction is unlikely to exert a big impact on its margin spread of RM1.80- 2.00/mmbtu currently. It had maintained near to RM2.00/mmbtu in the past two financial years and YTD 9MFY19 margin spread was c.RM1.97/mmbtu. Earnings spread from GMD and GMES is estimated at 75:25.

Upgrade to OP as excessive concern of earnings drop is unwarranted. We maintain our forecast for now as we believe the new tariff rate has minimal impact to its earnings and we are of the view that retail margin will form part of the RM1.80-2.00/mmbtu margin spread to its earnings, checking supernormal profit. Its share price has declined c.8% in the past month which we believe was due to concerns of new tariff sending earnings lower which is an over-reaction as its fairly small base of RAB of c.RM1.9b will see immaterial impact. Thus, we upgrade the stock to OP from MP which is backed by attractive net yield of c.5% with unchanged TP of RM3.00/DCF share. Risk to our upgrade is lower-than-expected RAB rate of return and sharp fall in demand growth.

Source: Kenanga Research - 26 Dec 2019