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Tuesday, January 22, 2013
MARC has affirmed the rating on Gas Malaysia Berhad's (Gas Malaysia) RM500 million Al-Murabahah Medium Term Notes (MTN) Programme at AAAID with a stable outlook
MARC has affirmed the rating on Gas Malaysia Berhad's (Gas Malaysia) RM500 million Al-Murabahah Medium Term Notes (MTN) Programme at AAAID with a stable outlook. Currently, there are no outstanding notes issued under the programme. The affirmed rating reflects Gas Malaysia's strong credit profile underpinned by its strong market position as the sole natural gas distributor in Peninsular Malaysia to a diversified customer base comprising industries, commercial businesses and households, zero debt burden and high liquidity levels. These credit strengths mitigate lower year-on-year pre-tax profit for the first nine months of 2012 (9M2012).
Gas Malaysia currently operates about 1,800km of gas pipelines in Peninsular Malaysia and is the only company licensed under the Gas Supply Act, 1993 by the Energy Commission to supply and sell reticulated natural gas in Peninsular Malaysia for a period of 30 years until September 1, 2028, strengthening its market position in the supply of natural gas. It also sells liquefied petroleum gas (LPG) under a second licence which expires on December 15, 2020. The company was listed on the main board of Bursa Malaysia in June 2012 and its major shareholders are the MMC Corporation Berhad-Shapadu Corporation Sdn Bhd consortium (40.7%), the Tokyo Gas Co. Ltd-Mitsui & Co Ltd consortium (18.5%) and PETRONAS Gas Bhd (14.8%), while Petroliam Nasional Berhad (PETRONAS) holds one special rights redeemable preference share.
Gas Malaysia operates in a highly regulated industry with significant government involvement in the pricing and supply of gas. This gives the company limited flexibility in managing its growth potential and financial performance. The signing of a new gas supply agreement with PETRONAS in February 2012 saw higher supply of gas from 382 million standard cubic feet per day (mmscfd) to 492 mmscfd on a step-up basis. This bodes well for Gas Malaysia amid continued demand for natural gas by the industrial sector. In addition, the company has allocated about RM140 million for expansion of its pipelines to increase market penetration.
The last price revision in June 2011 increased the buying price of natural gas by 27% to RM14.05/million British thermal units (mmbtu). However, the relatively lower incremental average selling price of natural gas of 7% to RM16.07/mmbtu resulted in Gas Malaysia's profit spread declining to RM2.02/mmbtu from RM3.95/mmbtu. Based on the published pricing structure by the Ministry of Energy, Green Technology and Water, Gas Malaysia's profit spread will be fixed between RM2.00/mmbtu and RM2.25/mmbtu going forward. Notwithstanding the published pricing structure, the government has delayed the selling price revisions since December 2011, which continues to pressure Gas Malaysia's profit spread. In addition, MARC notes that the additional gas supply under the new gas supply agreement has a second tier pricing which is based on market prices and the proportion of the market-priced gas supply will increase gradually as the government reduces the gas subsidies.
For 9M2012, revenue increased by 7.1% y-o-y to RM1.6 billion (9M2011: RM1.5 billion) due to higher sales volume for natural gas. On the other hand, pre-tax profit declined by 30.3% y-o-y to RM154.5 million (9M2011: RM221.8 million) as margins were compressed by the narrow spread between the buying and selling price of natural gas; the operating profit margin was lower at 9.4% (2011: 14.3%). Operating cash flow also declined to RM168.1 million (9M2011: RM229.1 million) attributable to lower pre-tax profit. Free cash flow remains negative at RM22.8 million (9M2011: -RM184.5 million) mainly due to payment of dividends; the company proposes a dividend payout ratio of 100% for 2012. Going forward, Gas Malaysia intends to adopt a dividend payout ratio of 75% or more, which MARC views positively in the context of internal capital generation. Gas Malaysia has consistently maintained its debt-free position over the past few years. There are no expectations of major capital expenditures (capex) in the near term and capital commitments stood at RM139.3 million as at September 30, 2012, mainly for expansion of pipelines.
The stable outlook reflects MARC's expectations that Gas Malaysia's overall credit metrics will remain supportive of its ratings over the next 12 to 18 months, underpinned by its defensible competitive position, satisfactory earnings generation and no major capex commitments.
Contacts: Se Tho Mun Yi, +603-2082 2263 / firstname.lastname@example.org; Sharidan Salleh, +603-2082 2254/ email@example.com.
January 21, 2013