Apr 17, 2016 23:00:16
Perusahaan Gas Negara - Inflection Point Is Near
We believe PGN’s earnings contraction would bottom this year, driven by new project contribution, lesser impairment and a mild volume recovery. Further, we see upside next year, with the economy and crude oil prices set to head north, lifting the company’s distribution volume and margins. Upon fine-tuning our forecasts, we upgrade PGN to BUY (from Neutral) for its undemanding valuation, with a higher DCF-based TP of IDR3,500 (from IDR3,200, 28% upside), implying FY16-17F P/Es of 15.0-12.0x.

¨ Lower impairment on its E&P assets. Based on its latest financial statement, Perusahaan Gas Negara (PGN) conducted an impairment test based on Brent crude oil prices of USD53.80-75.20/barrel (bbl) for the next five years, higher than the current crude oil price of below USD40/bbl. Barring any upside surprise to oil prices, impairment loss will likely surface again, although the projected amount would be lower than FY15 levels.

¨ Kalija to save the day. PGN has completed Phase 1 of Trans Kalimantan-Java pipeline (Kalija) that connects the Kepodang block to the Tambak Lorok power plant in Semarang. Contribution from this project would be significant, and Kalija’s tariffs are higher than PGN’s existing transmission pipe. Last we checked with management, PGN is transmitting 100 million standard cubic feet per day (mmscfd) of natural gas for this project.

¨ Distribution margin likely to improve in FY17F. For FY16F, we assume distribution spread of USD3.10/million British thermal units (mmbtu), lower than FY15’s USD3.34/mmbtu. This is due to PGN’s reluctance to increase its ASP amidst the heat of the gas price cut talk, and the likelihood of repricing for some of its gas supplies that expired in 4Q15. However, with expectations of a stronger GDP growth and recovery in crude oil prices, distribution margin will likely improve in FY17F, driven by an ASP hike and the reappearance of surcharges when volume recovers.

¨ 4Q15 result in line. FY15 net profit (-43.6% YoY, +21.9% QoQ) reached 95.4% of our estimate, with the quarter seeing a recovery in both gas distribution volume and distribution margin spread. PGN incurred a high impairment loss in its exploration and production (E&P) assets but bottomline was cushioned by lower taxes due to the amortisation of its unrecovered cost in oil exploration.

¨ Pending evidence of volume recovery. Although there are several media reports on higher electricity consumption, PGN’s indicative distribution volume for 1Q16 was identical to 1Q15 levels at around 800mmscfd. Based on the preliminary data that we gathered, we have witnessed higher natural gas consumption from power, cement and ceramic sectors.

¨ Key risk remains gas price intervention. Changes in the gas price cut blueprint that may directly impact PGN’s margins remain the key risk to our BUY call. Other risks are another correction of Brent crude oil prices and a deceleration of Indonesia’s economic growth.