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Apr 08, 2016 08:54:35
Perusahaan Gas Negara (PGAS): Climate change
- Improving economy to drive... : This stage of Indonesiaâ€™s economic cycle, is picking up steam and should result in an improved change for PGASâ€™ operating environment. Point in case would be Markitâ€™s report of a higher March Purchasing Managersâ€™ 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, PGASâ€™s distribution volumes would typically move in tandem with Indonesiaâ€™s PMI as about 97% of PGASâ€™ clients are industries and power plants. Thus, as the primary Indonesian gas distributor, with 83% share of the national gas pipeline, we expect PGASâ€™ 2016 distribution sales volumes to improve 8% y-y to 867 mmscfd, reaching 62% utilization of PGASâ€™ total capacity of 1,300mmscfd on 825km additional gas pipeline and contracts with Nestleâ€™s Indonesia plants in Lampung (+100km) and Tambak Lorok (>200km). In 2017, with additional 110km of new pipelines, we expect PGASâ€™ 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 Indonesiaâ€™s 2016 local gas distribution to rise 8% y-y to 4,144 bbtu/d with the additional gas in accordance with the governmentâ€™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 PGASâ€™ Floating Storage Regasification Unit (FSRU) in Lampung while Saka Energy, PGASâ€™ 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 PGASâ€™ 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 PGASâ€™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 governmentâ€™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 Indonesiaâ€™s economic improvement. That said, we expect PGASâ€™ 4% ytd market outperformance (exhibit 5) to persist.