The 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 given the smaller base of RAB of RM1.9bn. As such, we upgrade the stock to BUY with TP of RM3.00 backed by attractive net yield of c.5%

GASMSIA announced that the 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). 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.

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 but we 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 RM1.9bn 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. Earnings spread from GMD and GMES is estimated at 75:25.

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. Share price has declined c.8% in the past month which we believe was due to concerns of new tariff which is fairly small base of RAB of c.RM1.9bn will see immaterial impact.

Source: Rakuten Research - 26 Dec 2019