Gas Malaysia earnings not affected by tariff revision

MIDF Research reiterates ‘buy’ call on natural gas distributor

PETALING JAYA: Gas Malaysia Bhd’s earnings will not be impacted by the recently announced gas tariff revision but the implementation of the gas cost pass through (GCPT) mechanism could result in lumpy cash flows for the company.

MIDF Research, which reiterated a “buy” recommendation on the natural gas distribution company, with an unchanged target price of RM3.07, said in a report that Gas Malaysia’s prospects remain positive.

“The incentive-based regulation (IBR) framework is clearly having a positive impact on the group revenue and earnings as its regulated assets continue to increase.

“In addition, the IBR will provide financial neutrality to the company with respect with any gas costs fluctuations,” MIDF Research said.

The brokerage noted that Gas Malaysia’s guidance was that the increase in volume of gas sold and number of customers would sustain into financial year ending Dec 31, 2017.

On the revision of the natural gas tariff for the non-power sector, MIDF Research said in the note that there were “no changes made to earnings but we do acknowledge that there could be instances of lumpy cash flows due to the GCPT”.

Gas Malaysia on Wednesday announced it had received the approval from the Government to effect the revision of natural gas tariff for the non-power sector in Peninsular Malaysia from Jan 1 next year to Dec 31, 2019 in line with the IBR framework.

The company said the IBR framework would set the base tariff for a regulatory period of three years from January next year and allowed changes in gas costs to be passed through via GCPT mechanism every six months.

Under the GCPT mechanism, a tariff rebate of 40 sen per MMBtu (one million British thermal units) would apply to all tariff categories for the January to June 2017 period.

This would translate into an average effective tariff of RM26.31 per MMBtu, which was a reduction of 2.74% from the previous average tariff.

AllianceDBS Research said the measure would address uncertainty arising from fuelcost volatility for Gas Malaysia Bhd.

“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,” AllianceDBS pointed out.

In its report, the brokerage pointed out that the step-up base tariffs had imputed the RM1.50 per mmbtu gas cost increase every six months which would then allow deviation in the gas cost to be adjusted via a gas tariff revision every six months under the GCPT mechanism.

“There is no change in our earnings forecast as the gas tariff revision will be earnings-neutral for Gas Malaysia,” AllianceDBS said.

The brokerage maintained its “hold” rating on Gas Malaysia, with a target price of RM2.60.

Gas Malaysia’s shares rose two sen to close at RM2.49 yesterday.