A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 I P O Tuesday, May 22, 2012 FBM KLCI: 1538.91 Sector: Oil & Gas Gas Malaysia Berhad FV: RM 2.40(+7.9%) Gas In Gas Out THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Main Market Listing Non-rated TA Research Team Coverage +603-2072-1277 ext:1265 kyliechan@ta.com.my www.taonline.com.my Gas Malaysia Bhd (GMB) is a company seeking listing on the Main Market of Bursa Malaysia. Its IPO price for retail investors is set at RM2.20/share, which translates to FY13 PER of 16.7x. Our indicative target price of RM2.40 is based on DCF with WACC of 9.4% and long term growth rate of 2.0%. Valuations at this point seem stretched as our target price merely has an implied upside of 8% and total return of 13%. Duopoly. Currently, there are only two players licensed to distribute natural gas in Malaysia, namely Petronas Gas Berhad (PGB) and GMB. However, both companies serve different segments of the market, with PGB serving customers whose initial usage exceeds 2MMBtu, whilst GMB caters to customers with initial usage of less than 2MMBtu. Hence, both companies monopolize the supply of gas in their respective market segments. Recently, GMB signed a New Gas Supply Agreement (NGSA) with Petronas whereby effective 1 January 2013, the maximum limit for GMB to supply to its customers will increase from 2 MMScfd to 5 MMScfd, hence enabling GMB to expand market share. Offer for Sale. The IPO consists of offer-for-sale of 26% of its existing share base with no issuance of new shares. This fact that major shareholders are willing to pare down their stakes suggests a less than sanguine outlook on the company s prospects. Uncertain Growth in Supply and Demand There has been healthy increase in consumption of natural gas in Malaysia, with 20-year CAGR of 7.2% over 1990-2010. However, GMB s growth prospects are constrained due to shortage of natural gas supply since 2007. PGB s new Liquefied Natural Gas (LNG) regasification facility in Sungai Udang, Melaka (expected completion: July 2012) is expected to alleviate the supply shortfall when it comes on stream in September 2012. However, we note that GMB s additional gas allocation from PGB under NGSA is subject to higher unsubsidized selling prices, which would imply lower demand from GMB s customers. In the longer run, there may be increased gas supply upon completion of new Petronas projects, namely:- (1) North Malay Basin Project offshore Peninsular Malaysia with expectations of first delivery of gas by early-2013; and (2) new LNG regasification terminal in RAPID (integrated petrochemicals hub in South Johor) with expected commission date by end-2016. Share Information Listing Main Market Enlarged Share Capital (mn) 1284 Market Cap @ RM2.20 (mn) 2824.8 Par Value (RM) 0.50 Issue Price (RM) 2.20 Oversubscription rate NA Estimated free float (%) 26 Tentative Listing Date 11-Jun-12 Tentative Listing Dates Event Opening of the IPO Closing of the IPO Balloting of Applications Allotment of Shares Listing Tentative Date NA 25-May-12 NA 7-Jun-12 11-Jun-12 Ratio & Analysis NTA per share (post IPO)(sen) 1.42 Price to NTA (x) 1.6 Proforma ROE (%) 17.0 Proforma ROA (%) 15.7 Proforma Net Gearing (x) Net Cash Proforma Current Ratio (x) 2.4 Utilisation of Proceeds No Proceeds from share sale Dividend Play. GMB is essentially a cash cow with healthy cashflows, no borrowings, current net cash of RM227mn (RM0.18/share), and no major capex requirements beyond FY12f. GMB has guided capex of RM130-140mn in FY12 which will reduce to RM40mn p.a. in subsequent years. GMB s FY13f/14f Free Cash Flow yield is 6.5%/8.5% versus Dividend Yield of 4.5%/5.7% respectively. The disparity implies high likelihood of increased payout from its committed payout ratio of 75% from FY13 onwards (FY12: 100%). Page 1 of 12
Risks. Buying and selling prices of natural gas, which comprises more than 90% of GMB s total Cost of Sales are regulated by the government. GMB has no control over buying prices (price at which GMB purchases its gas supply from PGB) and selling prices (price at which GMB sells to its customers). In June 2011, GMB s gross margins halved to 13% from 26% upon the Energy Commissions (EC) price revision where purchase price was raised by 27.1% to RM14.05/MMbtu in comparison to a much lesser 7.1% increase to RM16.07/MMbtu in selling prices. GMB s margins are expected to contract by 7%/2% in FY12/13 to 9%/7% respectively due to GMB s inability to pass-on increased costs of natural gas to customers. VALUATION We value GMB at RM2.40/share based on DCF using a WACC of 9.4% and long term growth rate of 2.0%. This translates to a FY13 PER of 18.2x. BACKGROUND 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. The company was incorporated on 16 May 1992 pursuant to a joint venture between MMC-Shapadu, Tokyo Gas-Mitsui and PETRONAS on 30 March 1992. GMB has two wholly-owned subsidiaries, Gas Malaysia (LPG) Sdn Bhd and Pelantar Teknik (M) Sdn Bhd, which are responsible for the supply and sale of LPG via reticulation system and property holdings respectively. Figure 1: Key milestones Year Key Achievement / Milestones 1992 1997 Joint venture agreement entered into between MMC-Shapadu, Tokyo Gas-Mitsui and PETRONAS ( JVA ) Signing of the Gas Supply Agreement between PETRONAS as the seller and our Company as the buyer for the supply of gas. 1998 GMB obtained the Natural Gas Distribution License 2000 GMB obtained the LPG Distribution License 2009 2010 Signing of First Supplemental Agreement to the Gas Supply Agreement between PETRONAS as the seller and GMB as the buyer for the increase of gas supply from 150 MMScfd to 300 MMScfd Signing of Second Supplemental Agreement to the Gas Supply Agreement between PETRONAS as the seller and GMB as the buyer for the increase of gas supply from 300MMScfd to 382MMScfd. 2012 Signing of the new Gas Supply Agreement (NGSA) to increase gas supply from 382 to 492 MMScfd. Page 2 of 12
STATISTICS OF THE IPO 1. Market Cap based on IPO listing: RM 2,824.8mn ( based on IPO price of RM2.20/share), 2. Total IPO comprises offering of 333.84mn shares - institutional allocation is 303.3mn (23.6%) shares I. 147.7mn for bumiputra and selected investors approved by MITI. II. 155.7mn for institutional and selected investor. - and retail offering is 30.5mn (2.4%) shares. 3. Institutional price will be decided after bookbuilding exercise and the retail offering can be subjected to a refund in the event the final retail price is less than the RM2.20/share. CORPORATE STRUCTURE MGB s major shareholders post and pre IPO include MMC-Shapadu (local utilities and infrastructure company), Tokyo Gas-Mitsui (Tokyo Gas is Japan s largest city gas supplier whilst Mitsui is a global LNG player), and PGB. GMB s group s corporate structure pre and post IPO are as per Figure 2 and 3 respectively:- Figure 2: Corporate Structure pre-ipo Source: Prospectus Figure 3: Corporate Structure post-ipo Source: Prospectus Page 3 of 12
BUSINESS DESCRIPTION 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. 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. Figure 4: Process flow for Delivery of Natural Gas via NGDS Source: Prospectus Page 4 of 12
REVENUE BREAKDOWN Sale of natural gas is GMB s main revenue contributor, accounting for 98% of total revenue. The remainder of GMB s revenue base comprises of LPG sales and Tolling Fees charged for the usage of its pipeline to connect to noncustomers such as Petronas gas stations for natural gas vehicles (NGVs) and gas district cooling (GDCs) use. Figure 5: GMB Revenue breakdown by Product type FY09 FY10 FY11 Products RM (mn) % of Total RM (mn) % of Total RM (mn) % of Total Sale of Natural Gas 1727 98% 1775 98% 1962 98% Tolling Fees 10.9 1% 13 1% 14.3 1% Sale of LPG 15.7 1% 19.5 1% 23.6 1% Total 1753 100% 1808 100% 2000 1% PRODUCT PRICES Buying and selling prices of natural gas are regulated by the government, which has made three price revisions in 3 years between 2008 and 2011. Historically, the regulated prices are pegged to crude oil prices. Currently, selling prices of natural gas has been set to increase by RM3/MMbtu every six months starting from June 2011. However, buying prices (GMB s cost when purchasing gas supply from PGB) fluctuate according to the government s discretion. In June 2011, GMB s gross margin halved to 13% from 26% upon the Energy Commision (EC) s price revision. Nevertheless, GMB will only adjust its Average Selling Prices (ASP) under directive of the EC, which has yet to issue instructions for the second revision of gas prices scheduled to commence from 1 December 2011. Hence, GMB is currently selling natural gas at RM16.07 /MMBtu as per last revision in June 2011. Figure 6: Historical Gas Price Revision by the Government Period Buying Price (RM/ mmbtu) Selling Price (RM/ mmbtu) Spread (RM/ mmbtu) Oct 2002 Jul 2008 9.40 12.87 3.47 Aug 2008 Feb 2009 17.99 22.06 4.07 Mar 2009 May 2011 11.05 15.00 3.95 Jun 2011 Current 14.05 16.07 2.02 Figure 7: Government Regulated Buying and Selling Prices of Natural Gas from Jun 11-Dec 15 Sector Price before Revised Price based on Fixed Revision of RM3.00 per MMBtu every six(6) months revision (RM/MMBtu) 2011 2012 2013 2014 2015 June Dec June Dec June Dec June Dec June Dec GMB 11.05 14.05 17.05 20.05 23.05 26.05 29.05 32.05 35.05 38.05 41.05 GMB Customers 15 16.07 19.12 22.16 25.21 28.05 31.1 34.15 37.2 40.25 43.3 GMB's Gross Margin 26% 13% 11% 10% 9% 7% 7% 6% 6% 5% 5% Page 5 of 12
COST BREAKDOWN The major component of GMB s Cost of Sales is the purchase of Natural Gas from PGB which comprises >90% of total costs. Due to the fact that gas prices are regulated by the government, GMB has no control over this cost component. Hence, any upside for expansion in margin is limited. Figure 8: GMB s Cost Components Cost % of Total Cost of Natural Gas 93%-95% Cost of LPG 1% Depreciation 2%-3% Others 1%-4% MARKETS GMB s principal markets are located mainly in the Central and Southern region of Peninsular Malaysia, which comprises 41.3% and 32.2% of FY11 total sales volume respectively. As at February 2012, GMB serves 701 industrial customers, 546 commercial customers and 10,735 customers for natural gas, with industrial customers making up 99.0% of sales for the past financial years from 2008-2011. The top industrial users in terms of consumption are the Food & Beverage and Rubber sectors which take-up approximately 27% and 22%- 24% of GMB s gas supply between 2008-2011. Whereas for the LPG segment, GMB serves one industrial customer, 1,132 commercial customers and 20,663 industrial customers. GMB does not have one single customer contributing more than 10% of total revenue, hence minimizing customer concentration risk. Figure 9: Top 5 customers Revenue Contribution in FY11 % of Group Length of Relationship Customer Revenue (years) Nippon Electric Glass 2.9 16 Fatty Chemical 1.8 7 Malaysia Sheet Glass 1.9 17 Malayan Sugar Manufacturing 1.8 8 Hartalega 1.9 8 Figure 10: Geographical Breakdown of GMB markets Page 6 of 12
Figure 11: Breakdown of Sales Volume by Industry segment SUPPLY GMB s natural gas supply is sourced solely from Petronas which transmits gas to GMB s pipelines via the PGU network. Natural gas produced in domestic gas fields off the coast of Terengganu, or imported from West Natuna Indonesia and the PM3 Commercial Arrangement Area (CAA) are processed at gas processing plants in Kerteh and Paka, before entering PGU. PGB s supply to GMB is under the Take-or-Pay arrangement whereby GMB is obliged to pay for the full amount of contracted gas supply regardless whether GMB takes-up the amount partially or in full. Figure 12: Map of PGU pipeline in peninsular Malaysia Page 7 of 12
Figure 13: Maximum Gas Supply Volume for GMB from Petronas Period Maximum gas supply Volume per day (MMScfd) At Govt Regulated At LNG plus price * Total Price 2003-31 Oct 09 150-150 31 Nov 09 300-300 1 Dec 09 31 Dec 12 382-382 1 Jan 13 31 Dec 13 382 40 422 1 Jan 14 31 Jul 14 382 70 452 1 Aug 14 31 Dec 14 300 152 452 1 Jan 15 31 Dec 22 300 192 492 Source: Prospectus In anticipation of weak demand for higher priced natural gas, GMB intends to review its ASPs which are subject to approval by EC. In the event EC does not grant approval, hence GMB will not take-up Petronas allocation of gas supply which is subjected to LNG plus pricing. FUTURE EXPANSION Figure 14: Expansion Plans Expansion of Customer Base GMB plans to expand its customer base with increased supply of natural gas from Petronas s new projects (i.e. Project Lekas, RAPID, North Malay Basin Project, etc). Currently, expansion of customer base is curtailed due to limited additional supply of gas from PGB. Diversifying to CHP In order to cater for the increased demand for gas, and to increase its customer base, GMB has diversified into (CHP). CHP is an energy efficient system that generates electricity and thermal energy with a single fuel source. CHP has high thermal efficiency of up to 90% in comparison to 40% in conventional thermal generation, thus implying increased efficiency at a lower cost. Page 8 of 12
INVESTMENT SWOT Figure 15: SWOT analysis of GMB Strengths No threat of competition as GMB is the sole company licensed to supply and sell natural gas in Peninsular Malaysia for consumers whom initially consume 2 MMScfd and below. Wide strategic pipeline coverage across Peninsular Malaysia of approximately 1,800 km. Experienced and established management team. Strong strategic support from shareholders, namely MMC-Shapadu, Tokyo Gas-Mitsui, PGB and Petronas. Weaknesses Dependency on one major supplier of natural gas, ie, Petronas Operates in a regulated pricing environment whereby margins are subject to the government s revision of gas prices. Opportunities Increasing consumption of natural gas in Malaysia as evidenced by historical 20-year CAGR of 7.2% over 1990-2010. Additional gas supply allocation from Petronas new projects to import LNG and increase production of natural gas (i.e. Project Lekas, RAPID, North-Malay Basin project). Threats Limited natural gas supply and gas curtailments in Peninsular Malaysia. Competition with natural gas substitutes such as coal and diesel. OUTLOOK GMB has 12.6% market share, whilst the rest of the market is served by PGB with 87% share (market share is based on GMB s allocation of the total gas injected into PGU in 2011). GMB has a monopoly over its segment of users who initially consume 2 mmscfd and below as it is the sole licensed operator and distributor in this category. Moving forward, GMB has potential to expand its market share to users who initially consume 5 mmscfd and below when the NGSA comes to effect in January 2013. Figure 16: GMB market share of natural gas distribution Page 9 of 12
There has been healthy increase in the overall consumption of natural gas in Malaysia over the last two decades (20-year CAGR of 7.2% over 1990-2010). Although natural gas consumption only makes up 23.9% of the nation s energy use, it has the highest CAGR of 13.5% between 2000-2008 in comparison to 2.8% for other petroleum products and 5.3% for energy use. Hence, prospects are promising for increased usage of natural gas in-line with expansion in the industrial sectors. However, GMB s growth prospects are constrained due to shortage of natural gas supply for the domestic market since 2007. Over the past 5 years, production growth has been flat due to contracting reserves from the lack of new gas field discoveries off the coast of Peninsular Malaysia. Nevertheless, PGB s new regasification facility in Sungai Udang, Melaka with targeted completion date by July 2012 is expected to alleviate the supply shortfall. This facility, known as Project Lekas has capacity of 3.8mn tpa of Liquefied Natural Gas (LNG), which is equivalent to approximately 543 mmscfd of gas. Petronas will import LNG from the open market for conversion into natural gas at this facility. There is potential of GMB s gas allocation being increased as output from Project Lekas is ramped up progressively. However, we note that GMB s additional new allocation from PGB of 40/70/110 MMScfd in 2013/14/15 onwards under NGSA is subject to higher unsubsidized selling prices. The price of the new allocation is at LNG plus pricing (price of imported LNG plus regasification costs) which would imply lower demand from GMB s customers. Hence in anticipation of weak demand for higher priced natural gas, GMB intends to review its ASPs which are subject to approval by EC. In the event EC does not grant approval, GMB will resort to take-up supply from PGB up to the volume which is subjected to government subsidized selling prices only. In the longer run, there is also upside for increased gas supply for GMB upon the commencement of two other new Petronas projects, namely:- (1) North Malay Basin Project offshore Peninsular Malaysia expectations of first delivery of 100 mn MMSfd of gas per day by early-2013, and eventual ramp-up to 250 MMScfd by 2015; and (2) RAPID project integrated refinery and petrochemicals hub in South Johor with expected commission date by end- 2016. Petronas has indicated that it may build a new LNG receiving and regasification terminal in RAPID. Nevertheless, due to the fluid commencement dates of these projects which may be potentially delayed, we are not imputing additional gas supply from these projects to GMB in our earnings forecasts. Page 10 of 12
FINANCIAL HIGHLIGHTS In FY11, GMB s net profit declined 23% due to a 7% contraction in gross margins as a result of the government s price revision of natural gas prices in June 2011. Despite GMB registering revenue growth of 37%/35% in FY12/13, we expect GMB s FY12 net profit to decrease 32% in FY12 but increase slightly by 9% in FY13. We project 7% and 1% decline in EBIT margin for FY12/13 to 7%/6% respectively due to increased costs for natural gas supply. This is attributed to the government s regulated pricing system for natural gas whereby GMB has no control over. Figure 17: Revenue vs. Net Profit (RM mn) DIVIDEND POLICY GMB s management has committed to a dividend payout ratio of 100% for FY12. For the subsequent years, GMB targets a minimum payout of 75%, which translates to FY13-14 DPS of 9.9 and 12.6 sen respectively, or dividend yield of 4.5% and 5.7%. There is further room for dividend upside if GMB increases its targeted 75% payout to 100%, which equates to FY13-14 yield of 6.0%/7.7% respectively. We think that this would be a likely scenario given GMB s minimal capex requirements beyond FY12, strong operating cashflows, and zero gearing. GMB has guided capex of RM130-140mn in FY12 which would subsequently reduce to RM40mn p.a. in subsequent years. Furthermore, there is a significant disparity between GMB s FY13f/14f Free Cash Flow yield of 6.5%/8.5% and Dividend Yield of 4.5%/5.7% respectively. Figure 18: Peers Comparison Trading PER Target PER ROE Market Cap FY12 FY13 FY12 FY13 FY11 FY12 (RM mn) Petronas Dagangan 19.0 17.7 20.0 18.7 18.9 18.2 19,352.5 Petronas Gas 22.7 21.3 20.7 19.5 16.6 16.7 34,152.9 Gas Malaysia 18.2 16.7 19.9 18.2 17.0 17.8 2,824.8 Page 11 of 12
VALUATION We value GMB at RM2.40/share based on DCF using a WACC of 9.4% and long term growth rate of 2.0%. This translates to a target FY13 PER of 18.2x, which is at a discount compared to 18.7x for Petronas Dagangan and the same 19.5x for PGB. Figure 19: Discounted Cash Flow Valuation 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Net Present Value (NPV) of FCFF Year 0 1 2 3 4 5 6 7 8 9 Prior Year Cash Flow (CF) 235.3 242.4 249.6 257.1 264.9 272.8 Assumed CF Growth Rate 3% 3% 3% 3% 3% 3% Current Yr Cash Flow 46.2 182.4 240.2 235.3 242.4 249.6 257.1 264.9 272.8 281.0 PV of FCFF 46.2 166.8 200.7 179.7 169.2 159.3 150.0 141.2 133.0 125.2 Discount Rate (WACC) 9.4% Note:- Target Gearing = 0, Beta = 0.9, Market Risk Premium = 10%, Risk-free: 4% NPV of Cash Flows (RM mn) 1,471.2 Perpetual Growth Rate 2.0% Terminal Value (RM mn) 1,691.6 PV of Terminal Value (RM mn) 1,577.2 Firm Value (RM mn) 3,048.4 Share Capital (mn) 1,284.0 NPV per share (RM) 2.37 Target Price (Rounded) 2.40 Figure 20: Earnings Summary FYE Dec 2009 2010 2011 2012F 2013F Revenue 1,753.1 1,807.5 2,000.2 2,730.6 3,689.5 Cost of sales (1,403.0) (1,388.7) (1,677.7) (2,497.3) (3,440.0) Gross Profit 350.1 418.8 322.4 233.4 249.5 Gross Profit Margin (%) 20 23 16 9 7 EBITDA 360.5 422.0 329.8 248.9 264.0 EBITDA (%) 20.6 23.3 16.5 9.1 7.2 Pretax Profit 325.9 388.4 294.7 199.4 217.7 Tax (82.7) (90.1) (65.6) (44.4) (48.4) Net Profit 243.1 298.3 229.2 155.0 169.3 EPS (sen) 18.9 23.2 17.8 12.1 13.2 PER (x) 11.6 9.5 12.3 18.2 16.7 Dividend Yield (%) NA NA 7.3 5.5 4.5 Core ROE (%) - 26 25 17 18 Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, 50250 KUALA LUMPUR, MALAYSIA TEL: +603-20721277 / FAX: +603-20325048 (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 12 of 12