Apr 08, 2016 08:54:35
Perusahaan Gas Negara (PGAS): Climate change
- Improving economy to drive... : This stage of Indonesia’s economic cycle, is picking up steam and should result in an improved change for PGAS’ operating environment. Point in case would be Markit’s report of a higher March Purchasing Managers’ Index (PMI) to 50.6 (February: 48.7), reflecting economic expansion for the first time since September 2014. Reports of Indonesian manufacturing companies increasing raw materials purchases in March and the state-owned electricity company PLN booking sales volume growth of 8.9% y-y in 2M16 suggest rising business activities, which should translate to higher distribution volumes for PGAS this year.

- ... 8% y-y growth in 2016 distribution volumes, ... : Based on historical data (exhibit 4) with the exception of 4Q14, PGAS’s distribution volumes would typically move in tandem with Indonesia’s PMI as about 97% of PGAS’ clients are industries and power plants. Thus, as the primary Indonesian gas distributor, with 83% share of the national gas pipeline, we expect PGAS’ 2016 distribution sales volumes to improve 8% y-y to 867 mmscfd, reaching 62% utilization of PGAS’ total capacity of 1,300mmscfd on 825km additional gas pipeline and contracts with Nestle’s Indonesia plants in Lampung (+100km) and Tambak Lorok (>200km). In 2017, with additional 110km of new pipelines, we expect PGAS’ sales volumes to grow 9% y-y to 942mmscfd, also reflecting 62% utilization rate.

- ... supported by higher domestic gas distribution: The Energy and Mineral Resources Ministry estimates Indonesia’s 2016 local gas distribution to rise 8% y-y to 4,144 bbtu/d with the additional gas in accordance with the government’s efforts to support gas power plants as the main energy source. In addition, Tangguh LNG has committed to delivering 1.1m m3 LNG (equivalent to 61bcf) to PGAS’ Floating Storage Regasification Unit (FSRU) in Lampung while Saka Energy, PGAS’ subsidiary, plans to acquire an interest in Block B (South Natuna: 117mmscfd) and add to its current share of 8.9% in the Southeast Sumatra block (55mmscfd), raising PGAS’ supply.     

Outlook: Different approach to gas-selling price scheme
Previously, we had expected gas-selling prices to decline by 5% y-y to USD8.8/mmbtu, diminishing PGAS’s distribution margin from USD3.4/mmbtu to USD3.0/mmbtu. For now, we lower our gas-pricing assumption by 20% on a reduced gas-purchase price to USD3.8/mmbtu, but maintain our margin assumption of USD3.5/mmbtu and expect long-term price increases of 3% in both supply and selling volume. This is in line with the government’s plan to reduce its gas take up while maintaining its operator stake.

Recommendation: Upgrade to BUY and raise TP to IDR3,200
To reflect our new gas-pricing scheme, we cut our 2016 net profit by 3% to USD420m, but raise 2017F earnings by 7% on higher domestic gas allocation. On valuation, we increase our DCF-based (15% WACC) 12-month TP from IDR2,500 to IDR3,200. With 15% upside potential to our new TP, we upgrade PGAS from Reduce to BUY as we see the improved medium-term outlook and industrial gas demand dovetailing Indonesia’s economic improvement. That said, we expect PGAS’ 4% ytd market outperformance (exhibit 5) to persist.