Gas Malaysia earnings likely stable post IBR RP1

Gas Malaysia Bhd
(Jan 8, RM2.80)
Maintain add with an unchanged target price (TP) of RM3.11:In a recent meeting with the management, we gathered that Gas Malaysia Bhd’s earnings will likely remain stable post Incentive-Based Regulation (IBR) Regulatory Period 1 (RP1; 2020-2022). The current regulatory period is known as RP1, although the group implemented the IBR in 2016, in order to standardise it with the regulatory period of Petronas Gas Bhd in 2020. To recap, Gas Malaysia is the owner of its pipeline assets and the gas distributor to users that consume less than five million standard cubic feet per day of gas.

Under RP0 (2017-2019), Gas Malaysia’s regulated asset base (RAB) included both the book value of its pipeline assets as well as an assumption of one-month working capital required (for gas cost) which we estimate to be about RM1.8 billion. The regulated asset return for RP0 was 7.5%. In RP1, the RAB now consists of only the book value of its pipeline assets of about RM1.3 billion (according to our estimate) and the regulated asset return is expected to be slightly lower than for RP0. Gas Malaysia’s pipeline assets are placed under a revenue-cap regime in RP1, versus a price-cap regime in RP0, where gas volume growth is expected to track closely gross domestic product growth at 4.5% to 5%. Given the lower RAB and regulated return for RP1, we expect the group’s regulated business profit to be lower for 2020-2022 versus 2017-2019.

Previously, gas cost and distribution tariffs were bundled as one tariff, and fluctuations in gas cost were passed through under the Gas Cost Pass Through (GCPT) mechanism. In RP1, the GCPT mechanism is no longer relevant and shippers such as Gas Malaysia could earn 1% to 2% shipper margins (versus 0% previously in RP0) from shipping activities not regulated by the IBR. The additional margin from its shipping division will likely offset lower regulated earnings from its pipeline assets, according to our sensitivity analysis.

We keep our earnings forecasts untouched, pending more disclosures from the regulators (the actual RAB and regulated asset return). Our TP of RM3.11 is still based on 20.5 times forecasted calendar year 2020 price-earnings ratio (one-year mean). We are positive on Gas Malaysia given its stable earnings profile and attractive dividend yield of about 5% forecasted for the financial year ended Dec 31, 2019 (FY19) to FY21. We see limited earnings impact on the group from potential reforms in the power sector. The stock remains an “add”, with its attractive valuation and dividends as potential rerating catalysts. —CGS-CIMB Research,Jan 7