A potential squeeze on its margins from the recent hike in gas tariffs may unsettle investors of Gas Malaysia Bhd, at least until it clears the air.
In the meantime, analysts have had to do a bit of guesswork on whether the higher gas prices will work in Gas Malaysia’s favour.
The company announced two weeks ago that it had secured the Government’s approval to raise the tariff for natural gas to the non-power sector in Peninsula Malaysia by an average of RM3.24/mmbtu, or 20%, to RM19.32/mmbtu from RM16.07/mmbtu, effective May 1.
The increase hits industrial users of gas the hardest, with those consuming an average of 601 mmbtu to 5,000 mmbtu annually seeing their costs rise by 26%.
Gas Malaysia had also said its own cost of gas to be procured from Petronas will be “adjusted upwards accordingly” and that the purchase price will take into account the price of regulated natural gas from Petronas’ domestic resources as well as imported, market-price liquefied natural gas (LNG).
Although it did not reveal the new price at which it would buy gas from Petronas, Gas Malaysia said that assuming it continues to supply gas based on existing volumes, the impact of the tariff revision to its bottom line would be immaterial for the current financial year ending Dec 31, 2014.
The new tariff is not applicable to residential and retail commercial customers or the liquefied petroleum gas and natural gas for vehicle categories.
Gas Malaysia had also expressed confidence that its long-term profitability will remain healthy, and that it is poised for growth on the back of pent-up demand and rising gas consumption.
An analyst who tracks Gas Malaysia, however, is less upbeat, telling StarBizWeek that while the company’s existing customers are unlikely to renege on their gas deals, he believes its margins could come under pressure.
In spite of the price hike, Gas Malaysia probably won’t lose sales because it has a virtual monopoly on the supply of natural gas to the non-power sector in Peninsular Malaysia, the analyst says.
Heavy industrial users of gas will also need time to shift to other sources of fuel, coupled with the fact that locally-sourced gas, following the tariff adjustment, is still half the market price of imported LNG.
According to the analyst, Gas Malaysia’s management has dropped hints that its returns may no longer be as predictable with the new regime.
This could dent its main appeal as a stock, which comes from its ability to draw a fixed return under a stable and regulated tariff structure, providing certainty for investors.
Gas Malaysia is also cash-rich and a dividend stock, yielding between 3% and 4% each year. It has a policy to pay out at least 75% of its profit as dividends.
But without a 100% cost-pass-through mechanism, Gas Malaysia now looks like it’s in the same boat as Tenaga Nasional Bhd, opines an analyst.
The absence of a full cost-pass-through will mean that Gas Malaysia gets the short end of the stick from fluctuations in the market price of LNG, which is set to make up a larger proportion of its fuel mix in the near future.
According to an industry observer, the firm is still in talks with Petronas on its gas purchase price, which will ultimately determine whether it gets to maintain its margin spread, currently at RM2.02/mmbtu.
Both parties are also said to be discussing Gas Malaysia’s supply for 2016 and beyond.
Even so, an analyst points out that Gas Malaysia has a good chance of securing a fair return given that Petronas Gas Bhd, the listed gas subsidiary of the national oil firm, is its third largest shareholder with a 14.8% stake.
An analyst with MIDF Research believes that the new tariff will be neutral to Gas Malaysia as any increases to its end user prices should be netted off against a similar adjustment to its purchase price from Petronas.
“We expect its margin to remain intact at RM2.02/mmbtu (difference between Gas Malaysia’s existing average tariff of RM16.07/mmbtu and gas cost of RM14.05/mmbtu) post-tariff hike,” he says.
Gas Malaysia is the only entity in the country licensed under the Gas Supply Act 1993 by the Energy Commission to supply and sell reticulated natural gas through September 2028.
The last time Gas Malaysia raised gas prices was in June 2011 under a plan by the Government to cut subsidies for gas by RM3/mmbtu every six months until it reaches market parity.
Gas Malaysia had then upped its average selling price to the current RM16.07/mmbtu from RM15/mmbtu and buying price to RM14.05/mmbtu from RM11.05/mmbtu.
Wildcard
Maybank IB Research thinks the reason for the tariff revision was to facilitate the pass-through of higher gas costs due to the use of more expensive LNG-sourced gas.
Based the terms of Gas Malaysia’s gas supply agreement with Petronas, its supply mix began receiving imported LNG from the Malacca regasification plant since last year.
Gas Malaysia’s quota of cheaper regulated gas is, in fact, poised to decline from 382mmscfd last year to 300mmscfd next year, while its LNG usage will rise by nearly five times from 40mmscfd to 192mmscfd in the same period.
Petronas currently subsidises up to 382mmscfd of gas to Gas Malaysia at RM14.05/mmbtu, but anything above that is charged the existing LNG ex-Bintulu spot rate less 10% discount, which is upwards of RM40/mmbtu.
“Gas Malaysia has yet to announce its cost of LNG-sourced gas. We have assumed the cost of this to be at RM41.68/mmbtu (which represents the price being reflected in electricity tariffs), and the margin spread that Gas Malaysia earns to be consistent with that of regulated gas at RM2.02/mmbtu,” Maybank IB Research says in a report this week.
CIMB Research believes Gas Malaysia will shed more light on its buying price soon as the new tariffs come into effect on May 1.
“We think the announcement’s (tariff hike) impact on Gas Malaysia’s share price would likely be neutral. Although the lack of clarity on its margins could be an issue with investors, we note that its share price has declined by more than 10% since the beginning of 2014, so we think most of the risk has been priced in,” it points out.
Affin Investment Bank says in a note last month that it expects the government to unveil a single-tier weighted average gas price, a blend of both domestic and LNG pricing, by this month.
“At this point, we see little risk of margin compression given that Gas Malaysia’s margin is already one of the lowest vis-à-vis its regional peers,” the research house adds.
There are four “sell” calls on Gas Malaysia, one “hold” and two “buy”, Bloomberg data shows, with a consensus target price of RM3.76. The counter was last quoted at RM3.57 on Thursday.
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