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Thursday, 14 June 2018 | MYT 8:50 AM

Kenanga Research lowers Gas Malaysia to market perform

KUALA LUMPUR: Kenanga Investment Bank Research has reduced Gas Malaysia to market perform from outperform as it believes all positives have already been priced-in following a 7% increase in the share price in the past two weeks.

Nonetheless, the research house said on Thursday it remains positive on the company’s outlook for its steady volume growth coupled with the margin spread certainty. 

“We maintain discounted cashflow driven target price of RM3.05. The market perform call is also supported by its decent yield of 3%-4%. Risks to our downgraded call include stronger-than-expected sales volume and higher margin spread,” it said.

Gas Malaysia had on Wednesday announced that the Energy Commission 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 to December 2018 from RM30.90/mmbtu in January-June 2018.

This 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 77 sen per 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 1H18.

“The higher effective tariff rate will have neutral impact to Gas Malaysia’s bottom-line as it is a cost pass-through from higher gas costs. Nonetheless, we still continue to like the Incentive Base Regulation (IBR)  framework as it offers better earnings visibility. We also believe that this framework will stay beyond 2019 as it is a fair and transparent mechanism,” it said.

Kenanga Research expects the GCPT to stay beyond 2019. Like the other two regulated utilities companies, Tenaga Nasional (outperform; target price RM17.90) and Petronas Gas (outperform; target price: RM22.80), Gas Malaysia also faces the concern of any changes in GCPT mechanism that may negatively affect it under the Pakatan Harapan government’s populist policy. 

“In our opinion, it is unlikely that the authority will review the base-tariff under the current GCPT’s regulatory period of 2017-2019 as it does not impact the public directly given that it deals only with businesses. 

“And, we also believe that even beyond 2019, the base-tariff is likely to adjust according to market price as to lessen government’s burden since it is not involved with the general public directly,” said the research house.