For a third straight year, Gas Malaysia Bhd has won The Edge Billion Ringgit Club award for the highest return on equity (ROE) over three years in the utilities sector.

Gas Malaysia chalked a three-year weighted ROE of 19.1% from financial years 2017 to 2020, the period considered for this year’s BRC corporate awards. In 2019 — the first year in which Gas Malaysia won a BRC corporate award — it also took home the award for growth in profit after tax over three years.

Lending stability to the operating environment is the Incentive-Based Regulation (IBR) framework introduced in Malaysia in 2014 under the Energy Commission as part of the modernisation of the electricity supply industry.

Gas Malaysia’s earnings are expected to remain resilient over the next few years under the new Regulatory Period, which will cover the period of 2023 to 2025. Its management has guided that volume growth of natural gas would grow alongside the economy.

The stability provided by the IBR framework as well as the encouraging demand foreseen in the years ahead as the economy recovers have led analysts to upgrade their earnings estimates for Gas Malaysia.

Kenanga Research analyst Teh Kian Yeong writes in a report dated Aug 18: “We have forecast 3.8% demand growth in FY2021 and, for beyond, a flat 3% growth. On the other hand, given the solid results in the past three straight quarters, we believe our total margin spread of RM2.10 per mmBtu is too conservative.

“As such, we raised our total margin spread assumption to RM2.20 per mmBtu. This compels us to upgrade FY2021 to FY2022 estimates by 8% and 5% while net dividend per share is also upgraded proportionally based on an unchanged payout ratio of 90%.”

In the first half of the current financial year, Gas Malaysia recorded a healthy net profit growth of 27.55% year on year to RM117.97 million, despite the third round of the Movement Control Order implemented by the government during the period.

This is despite revenue falling 19.64% y-o-y during the period to RM2.53 billion. The better performance was attributed to higher gross profit, which was in line with a higher volume of natural gas sold, coupled with the recognition of revenue cap adjustment, as well as lower finance cost.

While earnings growth for regulated business is unexciting, there is growth from non-regulated business to add value to the gas utilities companies, including Gas Malaysia, says Teh in a sectoral report dated Sept 30.

Teh adds in the report that over the next 1½ years, under the current Regulatory Period, there is little earnings risk for Gas Malaysia from its regulated business.

Nevertheless, it remains to be seen how the global energy crisis will affect the Malaysian economy and the gas utilities regulatory framework. At the moment, the country’s energy supply is still secure, according to Deputy Energy and Natural Resources Minister Datuk Ali Biju.

This does not mean that the domestic market is insulated from the surge in natural gas prices. Spot prices for natural gas have more than quadrupled to record levels in Europe and Asia, and the persistence and global dimension of these price spikes are unprecedented, says the International Monetary Fund (IMF).

“Our expectation is that these prices will revert to more normal levels early next year when heating demand ebbs and supplies adjust. However, if prices stay high as they have been, this could begin to be a drag on global growth,” the IMF says in a blog post in late October.

Economists and analysts are split on whether natural gas price will remain high over the next few years. While there is not enough gas supply in the international market, they are uncertain whether demand will remain high.

Still, with natural gas being a transitory energy fuel towards green energy, more countries will be needing it to meet their global environment pledge, especially with many countries pledging to cut down on coal in their energy mix.