KUALA LUMPUR: CGS-CIMB Research expects Gas Malaysia’s earnings to remain stable as the additional shipper margin could offset the lower regulated earnings in the regulatory period 1 (RP1,2020 to 2022).
The research house had on Wednesday maintained its Add call with an unchanged target price of RM3.11, based on 20.5 times CY20F P/E (one-year mean P/E).
At a recent meeting with management, the research house gathered that Gas Malaysia’s earnings will likely remain stable post incentive-based regulation (IBR) regulatory period 1.
The current regulatory period is known as RP1, although the group implemented the IBR in 2016, in order to standardise with the regulatory period of Petronas Gas in 2020.
To recap, Gas Malaysia is the owner of its pipeline assets and the gas distributor to users that consume less than 5mmscfd 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 c.RM1.8bn.
The regulated asset return for RP0 was 7.5%. For RP1, the RAB will now consist of only the book value of its pipeline assets which is c.RM1.3bn (according to CGS-CIMB Research’s estimate) and the regulated asset return is expected to be slightly lower than RP0.
Gas Malaysia’s pipeline assets will be placed under a revenue-cap regime in RP1 vs. a price-cap regime in RP0, where gas volume growth is expected to track closely with gross domestic growth (GDP) at 4.5-5%.
“Given the lower RAB and regulated return in RP1, we expect the group’s regulated business profit to be lower in 2020-2022 vs. 2017-2019, ” it said.
CGS-CIMB Research pointed out that previously, the gas cost and distribution tariff were bundled as one tariff and the fluctuations in gas cost were passed through under the Gas Cost Pass Through (GCPT) mechanism.
Under RP1, the GCPT is no longer relevant and shippers such as Gas Malaysia could earn 1-2% shipper margin (vs. 0% previously under RP0) from its shipping activities which are not regulated under IBR.
The additional margin from the shipping division will likely offset the lower regulated earnings from its pipeline assets, according to our sensitivity analysis.
“We keep our earnings forecasts untouched pending more disclosures from the regulators (i.e. actual RAB and regulated assets return).
“We are positive on Gas Malaysia given its stable earnings profile and attractive dividend yield of c.5% for FY19-21F. 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 re-rating catalysts, ” CGS-CIMB Research said.
Did you find this article insightful?