12 June 2012

IPO: Gas Malaysia

Gas Malaysia Berhad (GMB) was established to sell, market and distribute natural gas and Liquefied Petroleum Gas (LPG). GMB is also responsible for the construction and operation of the Natural Gas Distribution System (NGDS), which is a system comprising 1,800km of gas pipelines and stations within Peninsular Malaysia owned by GMB. NGDS is connected to the Peninsular Gas Utilisation (PGU), which is the gas transmission pipeline across Peninsular Malaysia owned and operated by PGB.

GMB’s core business to sell, market and distribute natural gas to industrial, commercial and residential customers in Peninsular Malaysia via NGDS. In other words, GMB purchases natural gas from PGB and sells to GMB’s own customers at a profit margin. There are currently two players in Peninsular Malaysia’s natural gas distribution industry, comprising GMB and PGB. However, both serve different sets of customers, whereby GMB’s customer base consists of users that initially consume less than 2 MMScfd, whereas PGB supplies to PETRONAS customers consuming more than 2 MMScfd. Customers that initially consume less than 2MMScfd but subsequently increase their consumption exceeding 2MMScfd will remain as GMB’s customers.

Like a toll road?
Looking at it from a slightly different perspective, GMB’s business can be compared to that of PLUS i.e. a toll road operator. Basically, consider GMB’s pipeline infrastructure as a highway, while the “toll” is GMB’s absolute gross margins, i.e RM2.02-2.25, while the “cars” represent the volume of natural gas supplied to GMB’s customers. We believe this comparison is fair, as GMB does not bear the risk of volatile natural gas prices as it buys and sells natural gas at regulated prices. As such, further growth in GMB’s sales volume would further improve its economies of scale given that other costs are largely fixed administrative costs.

In February 2012, GMB signed a New Gas Supply Agreement (NGSA) with Petronas whereby effective from 1 January 2013, the maximum limit for GMB to supply to its customers individually will increase from 2 MMScfd to 5 MMScfd. The NGSA has a 10-year tenure with an option to extend for an additional 5 years. In addition, GMB also supplies LPG to consumers in Peninsular Malaysia.

Strong cash pile, 100% dividend payout for FY12. Management indicated that it will spend RM140-RM150m in FY12 for the expansion of GMB’s Natural Gas Distribution System and RM40m p.a. in both FY13 and FY14 for maintenance purposes. We think that it is possible for CAPEX to be funded internally, judging from the group’s huge cash pile of RM327m and retained earnings of RM360m as of Dec 2011. Besides, GMB is also committed to paying out 100% of its FY12 net earnings as dividends and it is targeting a minimum payout ratio of 75% from FY13 onwards.

Source: TA Securities, OSK Research, RHB Research Institute

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