• Base tariff for three-year regulatory period fixed with increments every six months
   
• Gas cost pass-through mechanism to revise gas tariff every six months

• 2.74% reduction in effective gas tariff for Jan-Jun17

• Maintain HOLD and RM2.60 TP

What’s New

Gas Malaysia announced that the government has prescribed the Incentive Based Regulation (IBR) framework for the revision of the natural gas tariff for the non-power sector in Peninsular Malaysia from 1 Jan 2017 to 31 Dec 2019. The base tariffs over the 3-year regulatory period have been fixed and changes in the gas costs will be passed through via the gas cost pass through (GCPT) mechanism on a semi-annual basis. Therefore, a tariff rebate of RM0.40/mmbtu will be applied under the GCPT mechanism, resulting in an effective gas tariff of RM26.31/mmbtu for Jan-Jun17. This represents a 2.74% reduction from its Jul-Dec16 tariff which could be due to cheaper LNG prices. We believe the step-up base tariffs have imputed the RM1.50/mmbtu gas cost increase every six months which will then allow deviation in the gas cost to be adjusted via a gas tariff revision every six months under the GCPT mechanism. While the GCPT mechanism has been widely anticipated by the market, the step-up base tariffs over the regulatory period has effectively quashed any concerns over the government’s commitment to rationalise gas subsidy. This will also remove any uncertainty arising from fuel cost volatility for Gas Malaysia and gas sales volume will be the key earnings growth driver.

There is no change in our earnings forecast as the gas tariff revision will be earnings-neutral for Gas Malaysia. We reiterate our HOLD rating and TP of RM2.60, based on DCF valuation (8.7% WACC, 3% TG).

Source: Alliance Research - 29 Dec 2017