By G. Sharmila
Natural gas supplier Gas Malaysia Bhd announced on December 22 that under the latest natural gas tariff revision, the average gas tariff will be hiked by 17.11% effective Jan 1, 2016. Analysts seem to think the latest hike will bode well for the company.
Business model: Gas Malaysia Bhd sells, markets, and distributes natural gas to the industrial, commercial, and residential sectors in the country. On December 22, it announced that the government had revised the natural gas tariff for the non-power sector in Peninsular Malaysia, effective Jan 1, 2016.
Under this revision, the average gas tariff will be hiked by 17.11% from RM21.80/MMBtu (one million British Thermal Units) to RM25.53/MMBtu and that there will be no change to the selling prices to residential customers. According to Affin Hwang Capital, the revision is in line with the national rationalisation plan, whereby the price of piped gas will be adjusted bi-annually with the implementation of the gas cost pass through (GCPT) mechanism.
Shareholders and management: Gas Malaysia is part of the MMC Group, which is owned by business tycoon Syed Mokhtar Al-Bukhary. The company’s major shareholders are MMC via Anglo Oriental (30.9%), Tokyo-Gas-Mitsui (18.5%) and Petronas Gas (14.8%).
The company is run by its chairman, 58-year old Hasni Harun, who was appointed to this position in May 2013. According to the company’s 2014 annual report, he is a member of the Malaysian Institute of Accountants and holds a Masters degree in Business Administration from United States International University San Diego, California and a Bachelor of Accounting (Honours) degree from University of Malaya.
In 2007, he joined MMC as its group chief operating officer. In March 2008, he was appointed as the CEO, prior to his appointment as the group managing director of MMC in May 2010, a position he held until May 2013. He is currently a director of Permodalan Felcra Sdn Bhd.
Share performance: As of Dec 28, Gas Malaysia has a 52-week trading range of between RM1.93 and RM3.22, with a one-year return of -21.53% according to data from Bloomberg. It has severely underperformed the FBMKLCI index over the past year, as that index had a one-year return of -2.32% as of December 28. According to Reuters, the stock has a beta coefficient of 0.85, which indicates that its trading is less volatile than market average (a coefficient of 1 and above is indicative of high trading volatility).
What analysts think: Analysts tracked by KINIBIZ were either optimistic or neutral on the stock’s prospects despite the tariff hike. Affin Hwang, in a report on December 23, said that while the gas tariff hike was not a surprise, the quantum of the hike was steep relative to the previous hike of 10.3% in July this year.
“Nevertheless, the tariff hike will be earnings neutral for GMB, as the group’s gas purchase cost will also be adjusted upwards accordingly (ie the benefit accrues to Petronas),” the research house commented in its report. It maintained its ‘buy’ rating on the stock however, at an unchanged target price of RM2.58.
Kenanga Research, which has an “outperform” call on Gas Malaysia, said that with Gas Malaysia’s profit margin spread being fixed at RM1.58/MMBtu, earnings visibility is expected to be high as opposed to the 4Q14-1Q15 period. This is when earnings were hit by margin compression as business volume increased, which meant that the expensive LNG (liquified natural gas) component increased.
“Meanwhile, the five-year RM700 million-RM800 million capex on pipeline expansion shows that Gas Malaysia is confident of securing additional new gas supply from its current 492 mmscfd (million standard cubic feet of gas per day) guaranteed supply from Petronas. This could be a new earnings catalyst,” Kenanga opined.
Maybank IB Research, which has a “buy” rating on Gas Malaysia, was also optimistic on the tariff hike. It noted that Gas Malaysia is due to move to the incentive-based regulation (IBR) tariff framework in January 2016. “There was some uncertainty over GMB’s spreads and profitability post migration. This overhang is now removed.
“We have marginally raised our FY16/FY17 earnings by 2%/3%, and our TP to RM2.70 (from RM2.65) to reflect these latest changes in pricing and volume. We have assumed spreads remain stable at RM1.58/MMBtu,” it said in a December 23 report.
Earnings forecast:
StockStalk: We tend to agree that the switch to the IBR scheme will be good for Gas Malaysia in the long run, although it remains to be seen whether the latest hike will hugely impact the company’s earnings in the short-term. We also like that regular and so-called guaranteed supply to Petronas is a possible earnings catalyst and think that investors should take note of this when deciding to invest in the company. All in all, the tariff hike and IBR are plus points about Gas Malaysia that investors should not ignore.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KiniBiz makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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