Macquarie PGAS divvy surprise

PGAS – 4Q08 results delay well-intentioned

I sense that investors are getting nervous about PGAS management’s decision to delay FY08 results subsmission, as the company is reportedly asking for approval to capitalize FX loss, rather than expense it in one year. Making the matter worse is the Street talk that Bapepam (capital market regulator) has voted down the request, as Indonesia is moving towards international accounting standard.

After speaking with a company contact, I get the impression that PGAS management is acting in the best interest of the shareholders, when it tries to capitalize FX loss. I take it as a sign that the management wants to pay significantly bigger dividend than the current consensus DPS estimate of Rp61 (or 2.6% gross yield). Mind you, the govt of Indonesia has a set dividend income target from all SOEs, but the state banks are set to lower dividend payout in 2009 to conserve capital. So the government could be looking for a positive offset from the cash generative PGAS and PT Telkom.

Do watch out for a positive market reaction after PGAS released its 4Q08 results and its management discussed the rationale and outlook. The positive dividend surprise is still looking likely, despite the fact that PGAS won’t capitalize its FX loss. Macq’s FY09 DPS estimate is Rp74 (or 3.2% gross yield).

Let me run through my thought process:
1. The company guides for an FX loss of around Rp2.1trn vs. Macq’s forecast of Rp1.3trn. Macq’s FY08 net income estimate is Rp2.4trn, consensus is at Rp2.1trn. Using Macq’s forecast but adjusted for the bigger-than-expected FX loss, FY08 NPAT could come in around Rp1.8trn.

2. Macq’s DPS estimate of Rp74 equates to a total dividend bill of Rp1.7trn, or a payout ratio of 70%. Consensus DPS estimate of Rp61 equates to a total dividend bill of Rp1.4trn, or a payout ratio of 60%.

3. These pay-out ratios are within the prospectus mandate. Why would the management go into a great length trying to capitalize FX if it is only looking to pay between Rp61-74 DPS ??

4. I got the re-assurance from a company contact that there is no other reason for the FX capitalization other than an attempt to maximize dividend flow. Operational results are doing fine up to March.

5. Stress-testing the balance sheet, PGAS can afford to double the consensus DPS estimate of Rp61 for FY09. At Rp122 DPS (or 5.2% gross yield), the pay-out ratio based on adjusted Macq’s forecast (using company’s FX loss guidance) is 150%. I understand that there could be some regulations that make it difficult for a company to have more than 100% pay-out ratio.

On Macq forecast the stock trades on 8.7x and 7.1x adjusted P/E for 2009 and 2010, with a mid-teen growth outlook for FY10-12. Attractively valued for a cash generative utility with above-average growth prospects. Outperform, PxT Rp3,100.