MARC has assigned preliminary ratings of AAAIS/MARC-1IS to Gas Malaysia Distribution Sdn Bhd's (GMD) proposed Islamic Medium-Term Notes (IMTN) programme and Islamic Commercial Papers (ICP) programme with a combined limit of up to RM1.0 billion. The ratings outlook is stable.

GMD is a wholly-owned subsidiary of Gas Malaysia Berhad and was established under a group-wide reorganisation that includes the transfer of Gas Malaysia's natural gas distribution system (NGDS) to GMD. The reorganisation is in line with the implementation of the third-party access (TPA) system for the domestic gas industry. An equivalent amount of IMTN to be issued under the proposed IMTN programme will be exchanged to Gas Malaysia's current outstanding IMTN of RM281 million under its existing IMTN programme (rated: AAA/Stable). Upon the exchange, all the outstanding IMTN of Gas Malaysia will be cancelled.

The assigned ratings on GMD's proposed sukuk programmes reflect MARC's assessment that the credit profile of GMD does not materially differ from its parent Gas Malaysia, whose earnings-generating assets, namely the NGDS, have been transferred to its subsidiary. As the sole owner of the NGDS, GMD will have a significant market share in the domestic gas distribution business. The NGDS spans about 2,396km across Peninsular Malaysia, covering most industrial areas along the Peninsular Gas Utilisation (PGU) system. The NGDS has an established operating performance with a very high reliability rate. MARC continues to view the NGDS as a high entry barrier for other players wanting to enter the large-scale gas distribution business given the significant capital investment required for pipeline construction.

GMD derives revenue from tolling fees charged to gas shippers for using its gas pipelines. The procurement of gas supplies and securing customers are undertaken by gas shippers which consists of third parties as well as sister company Gas Malaysia Energy and Services Sdn Bhd (GMES) to which Gas Malaysia will novate its gas procurement agreements with the PETRONAS group and gas supply agreements with customers.

GMD's earnings are expected to be stable, underpinned by the tolling fee setting mechanism under the incentive-based regulation (IBR) framework. To date, the overall impact from the COVID-19 pandemic on the yearly volume is still uncertain; however, the tolling volume has shown steady recovery in May 2020 after the government eased restrictions on the operations of certain sectors. GMD's pre-tax profit is expected to grow between 0.4% and 1.8% on the back of tolling fee revenue in the next three years. Cash flow is expected to be robust with cash flow interest and debt coverages of 16.1x and 0.6x. Additional issues under the proposed sukuk programme will primarily fund GMD's capex and working requirement as well as for Gas Malaysia for which the parent will provide a guarantee to sukukholders. The borrowings will contribute to a projected net debt-to-equity (DE) ratio of 0.28x in 2021.

The stable outlook assumes that GMD will maintain its near monopoly in the gas distribution business and adhere to a prudent approach to financial management such that its credit metrics remain commensurate with the ratings.

Lee Chi Han, +603-2717 2939 /chihan@marc.com.my
Neo Xue Wei, +603-2717 2937 /xuewei@marc.com.my
Sharidan Salleh, +603-2717 2954 / sharidan@marc.com.my

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