Sep 06, 2017 14:28:38

Perusahaan Gas Negara ($PGAS) – Another Downside Surprise On Distribution Margin

PGN recorded a 2Q17 net loss of IDR41.2m – below our and consensus estimates – driven by a high quarterly ETR and contractions in both its gas distribution volume and distribution dollar margin, which were below management’s guidance. Other than the disappointing performance, we do not see any positive catalysts for the immediate term. Thus, we downgrade our recommendation to NEUTRAL (from Buy) and cut our DCF-based TP to IDR2,000 (from IDR3,450, 6% downside), post the corresponding 40% reduction in our FY17-18 earnings estimates.

- Volume declined after non-renewal of Muara Tawar contract. Perusahaan Gas Negara’s (PGN) distribution volume as of 6M17 declined 8.2% QoQ or 5.9% YoY. This was due to the non-renewal of Perusahaan Listrik Negara’s (PLN) Muara Tawar power plant gas purchase agreement which expired in March (the contracted amount was approximately 100mmscfd at USD7.90/mmbtu). While PGN did not officially announce this, the market was informed through PLN’s announcement and analysts speaking to management separately. Thus, we believe the market has priced in the decline in volume, but not the further erosion in distribution margin.

- Distribution margin at a new low, back-loading of opex and high effective tax rate (ETR). PGN's 2Q17 revenue/gross profit fell 10.9%/28.8% QoQ respectively, and it recorded a net loss of USD41.2m. Its gross margin narrowed to 23.7% (1Q17: 29.7%). Based on our calculation, its 2Q17 blended gas distribution margin hit a new low of USD2.32/mmbtu (1Q17: USD2.58/mmbtu) on a lower distribution ASP of USD7.95/mmbtu (1Q17: USD8.56/mmbtu). Opex surged 82.4% QoQ. PGN also recorded another impairment loss of USD16.7m on its oil and gas assets.

- Gas distribution price is declining without intervention. PGN's declining ASP is a major headwind in sustaining its guided distribution margin of USD2.60-3.00/mmbtu, even without direct intervention. There is still pressure from industrial users asking for a lower natural gas price – and the issue is further exacerbated by pressure from the power sector which forms the bulk of its demand. From our conversation with some business owners and judging from PGN's distribution volume breakdown, both industrial and power sector demand for natural gas remains weak.

- No visible positive catalyst; downgrade to NEUTRAL. PGN is now trading at 15.5x/13x FY17F/FY18F P/Es, on our revised estimates - ie valuations are no longer cheap. We roll over our DCF base year to FY18, while our new TP of IDR2,000 implies 12.5x FY18F P/E. We believe PGN may eventually become a high crude oil beta stock, due to the expansion of its exploration and production arm, Saka Energi (which now contributes to 15% of revenue but is not profitable). That said, its gas distribution business outlook remains unclear at this juncture. (Norman Choong, CFA)