KUALA LUMPUR, June 14 — Kenanga Investment Bank has downgraded Gas Malaysia Bhd to market perform from outperform as it believes all positives have already been priced-in following a seven per cent run in its share price in the past two weeks.
The investment bank remains positive on Gas Malaysia's outlook for its steady volume growth coupled with the margin spread certainty.
“The higher effective tariff rate of RM32.69/mmbtu in 2H18 will have a neutral impact on Gas Malaysia's bottom-line as it is a cost pass-through from higher gas costs. Nonetheless, we still continue to like the incentive-based regulation (IBR) framework as it offers better earnings visibility,” it said in a note today.
Kenanga Investment Bank believes that the IBR framework will stay beyond 2019 as it is a fair and transparent mechanism.
Yesterday, Gas Malaysia announced that the government had approved the half-yearly natural gas base-tariff rate revision for non-power sectors in Peninsular Malaysia to RM31.92/mmbtu on average for July-December 2018 from RM30.90/mmbtu in January-June 2018.
The revision is in line with the national rationalisation plan and Gas Cost Pass-through (GCPT) announced in December 2016.
In addition, under the GCPT framework, a surcharge of RM0.77/mmbtu will apply to all tariff categories due to higher actual gas costs against the reference gas costs, translating to an average effective tariff of RM32.69/mmbtu which is slightly higher than RM32.52/mmbtu for the first half of 2018.
“This is not a surprise to us as it is a scheduled half-yearly revision while the tariff revision has a neutral impact on Gas Malaysia on a six-month lagged basis as it is a cost pass-through under the GCPT mechanism,” said Kenanga Investment Bank.
With the implementation of the GCPT in January 2016, which is similar to the Imbalance Cost Pass-through (ICPT) for the power sector in Peninsular Malaysia, upward revisions in natural gas tariffs are expected in the upcoming reviews until the gas price reaches market price.
Kenanga Investment Bank said Gas Malaysia's profitability would not be affected as its profit margin spread is determined under the IBR framework based on asset return of 7.5 per cent, which is estimated at between RM1.80/mmbtu and RM2.00/mmbtu currently.
“As such, any price hikes will have a neutral impact on Gas Malaysia via the GCPT adjustment,” it added.
Gas Malaysia was flat at RM2.94 as at 10.55am. — Bernama