MARC has affirmed its AAAIS/MARC-1IS ratings on Gas Malaysia Distribution Sdn Bhd’s (GMD) 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’s stable revenue generation from distributing natural gas in Peninsular Malaysia through the natural gas distribution system (NGDS) which it owns and provides a near-monopolistic position remains a key rating driver. The rating is also supported by the incentive-based regulation (IBR) framework under which revenue risk is mitigated.
GMD’s natural gas distribution was impacted by movement restrictions which weighed on customer demand, leading to about 205.2 million MMBtu of total gas volume distributed in 2020, 7.3% lower than forecast. It received lower tolling fee revenue of RM385.1 million (forecast: RM415.6 million); however, under the IBR framework, it was able to recover about RM31.1 million in revenue under-recovery through an upward adjustment of its average distribution tariff to RM2.05 per MMBtu for the period between April 1 and December 31, 2021, from RM1.88 per MMBtu previously.
GMD recorded pre-tax profit of RM209.8 million with a strong operating profit margin of 53.6%. It also registered strong cash flow from operations (CFO) of RM214.2 million with healthy CFO interest and debt coverages of 16.63x and 0.51x. Its debt-to-equity ratio stood at 0.30x as at end-2020 and is expected to rise to about 0.44x by 2025 as the group increases its borrowings to undertake a capex programme to increase its regulated base. This may apply pressure on free cash flow (FCF) generation, which was negative RM60.9 million in 2020. As GMD realises its plan, the rating agency expects the group to maintain its debt metrics within forecast; any sharp deviation may trigger rating pressure.
During 2020, total capex of RM171.1 million accounted for 89.8% of planned capex with the unutilised portion carried forward to 2021. In the event the actual capex is lower than planned capex in Regulatory Period 1 (RP1: 2020–2022), GMD’s opening regulated asset base in RP2 (2023–2025), which partly determines regulated return, will be lower than projected.