Wednesday, June 17, 2015

CIMB Research lowers Gas Malaysia target price to RM2.25

KUALA LUMPUR: CIMB Equities Research has lowered Gas Malaysia’s target price from RM2.89 to RM2.25 on news that the introduction of incentive-based regulation (IBR) for the gas sector is well under way.

It said on Thursday it is negatively surprised that IBR could be implemented by as soon as January 2016.

“This is negative for Gas Malaysia as its earnings could drop under the IBR’s pricing framework. We cut our FY15-17 EPS by 2%-19% as we factor in the potential impact of IBR.

“We lower our target price to RM2.25 as we change our valuation method to sum-of-parts from 22 times CY16 P/E to better reflect its earnings composition. We also downgrade to Reduce from Hold as IBR could lead to a sharp earnings erosion.

“The key de-rating catalysts are the introduction of IBR by the end of the year and weaker earnings in 2016. We prefer Petronas Gas for more stable earnings,” it  said.

CIMB Research said it attended an analyst briefing hosted by Gas Malaysia’s CEO Ahmad Hashimi Abdul Manap.

The key takeaway is that the government is likely to introduce IBR to regulate natural gas tariffs in Peninsular Malaysia. The IBR, similar to the one that regulates Tenaga’s electricity tariff, aims to compensate Gas Malaysia a fair return on its pipeline assets.

“The introduction of IBR is not unexpected but its timing is earlier than expected. IBR is expected to have a huge impact on Gas Malaysia as its pipeline assets contributed 99% of its revenue last year,” it said.

The research house said under the IBR, Gas Malaysia’s earnings from its pipeline assets will be a product of 1) value of the assets and 2) WACC of these assets as determined by the government.

“We understand that the current value of Gas Malaysia’s pipeline assets is around RM1.1bn. Its WACC, however, is still being determined by the government. If the IBR is implemented on Jan 1,  2016, our best case scenario estimates that the company’s net profit in 2016 will be 7% lower than that in 2014 while the worst case estimates a much larger decline of 40%,”  it said.

CIMB Research said its  earnings forecast and target price assume that the government will allow Gas Malaysia to earn a return on its pipeline assets that is higher than its actual WACC.

“This is not unreasonable because the government has also allowed Tenaga to earn a premium over its actual WACC on its transmission and distribution assets. However, should the final WACC used in the IBR match Gas Malaysia’s actual WACC, Gas Malaysia’s market value may fall close to its book value. This represents a 70% downside from its current share price,” it said. - THESTAROLINE

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