MARC AFFIRMS ITS AAAID RATING ON GAS MALAYSIA’S AL-MURABAHAH MTN PROGRAMME

MARC has affirmed the AAA_ID rating on Gas Malaysia Berhad’s (Gas Malaysia) RM500 million Al-Murabahah Medium-Term Notes (MTN) programme with a stable outlook. The rating incorporates Gas Malaysia’s strong competitive position in natural gas distribution in Peninsular Malaysia, which is supported largely by reliable supply of natural gas from national oil and gas company Petroliam Nasional Berhad (PETRONAS) under long-term contracts. Additionally, the rating considers the company’s very strong financial profile and ample liquidity. These positive factors notwithstanding, MARC acknowledges the potential impact on the company’s credit profile from any regulatory changes to the tariff structure of natural gas pricing and to the allocation of subsidised natural gas volumes.

Gas Malaysia is the sole distributor of piped natural gas to the non-power sector for users consuming 5 million standard cubic feet per day (mmscfd) and below in Peninsular Malaysia under a 30-year license agreement expiring in September 2028. Focused capital investment on the gas pipeline infrastructure has resulted in a steady expansion of its network in Peninsular Malaysia, with 200 km of pipeline added in 2013 to bring the total length to 2,000 km. The network, which is connected to the Peninsular Gas Utilisation (PGU) system, supplies natural gas to industrial, commercial and residential users. Despite increasing sales volumes, Gas Malaysia’s profitability has remained flat due largely to regulated selling and purchase price of piped natural gas.

The recent 9.6% increase in the regulated purchase price of piped natural gas against a 2.3% increase in average selling price effective November 1, 2014 will weigh on Gas Malaysia’s profit margins. A reduction in its subsidised gas allocation from 382 mmscfd currently to 300 mmscfd, which is pending schedule negotiations with the relevant authorities, could also exert further pressure on profit margins as purchase of gas supply above the allocated subsidised volume would be priced at higher market rates. However, the impact on profitability should be mitigated by scheduled increases in the average selling price under the government’s subsidy rationalisation plan.

For the first nine months of 2014 (9M2014), Gas Malaysia’s revenue and pre-tax profit increased by 16.3% year-on-year (y-o-y) to RM1,993.0 million (9M2013: RM1,713.0 million) and 11.0% y-o-y to RM188.8 million (9M2013: RM170.1 million) respectively due to higher sales volume and increased pricing structure in May 2014. Gas Malaysia’s financial profile and overall credit quality will hinge on its continued ability to mitigate its exposure to an unrecoverable increase in natural gas procurement costs and to sufficiently recover the costs of its capital investments in gas pipeline expansions through adequate tariff levels.

Cash flow from operations increased to RM230.4 million in 9M2014 (9M2013: RM151.0 million). Free cash flow, however, remained negative at RM5.5 million due to higher capital spending and dividend payments. As at end-September 2014, Gas Malaysia’s capital commitment to expand its gas pipeline network increased to RM190.8 million, a sharp increase from its historical capex levels of around RM130 million. However, its healthy cash and cash equivalent of RM291.0 million and zero debt burden in 9M2014 provides comfortable headroom for the increased capital expenditure. MARC also continues to view Gas Malaysia’s liquidity position as strong given its healthy cash balance levels. 

The stable outlook incorporates MARC’s expectations that Gas Malaysia’s business and financial risks will remain low over the next 12 to 18 months, a key driver of which will be the developments pertaining to domestic gas prices and subsidised gas volume from the relevant authority. However, the potential reduction in subsidised gas volume, should it materialise, would affect the company’s credit profile and exert downward pressure on Gas Malaysia’s rating.

Contacts: Sonia Lim, +603-2082 2267 / sonia@marc.com.my; Sharidan Salleh, +603-2082 2254/ sharidan@marc.com.my.

November 24, 2014