Bisnis Indonesia reported last week that PGN may face losses on its cross-currency (USDJPY) swap contract due to hedging transactions on its debts. Officials from the
company were quoted as saying that they were still working on the extent of the loss. Such potential loss arose from JBIC’s JPY denominated loan, which was provided to the government of Indonesia and then on-lent to the company. The size of the loan amounted to JPY49bn and a third of it was hedged (~JPY19bn or USD213mn). While being devoid of a number, we believe PGN’s balance sheet can take on a fair bit of hit before material impairment (9M08 annualized EBITDA stood at ~USD500mn, net debt/EBITDA at 1.2x, and net debt/equity at 84%). As of Sep 08, the company actually reported gains on its swap contracts of ~USD2.5mn, which should serve as a cushion to a loss. Moreover, the contract will only be settled when PGAS can buy JPY after Aug 2011; hence the potential loss is unrealized and will have no current cash flow impact.
We maintain our BUY recommendation on PGAS
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