Perusahaan Gas Negara Update-1

JP Morgan - Buy Perusahaan Gas Negara (PGAS)
Buy Perusahaan Gas Negara (PGAS): 2Q10 results addressed earlier concerns about gas volume drop-off, that was caused by government intervention on gas allocation. Distribution volume is returning to normal but more importantly, average selling price jumped 5.4% QoQ, driving a 16% QoQ growth in EBIT. If we assume the 2Q10 EBIT of Rp2,456bn is sustained in Q3 and Q4, full year EBIT can reach around Rp9.5trn – this is 8% higher than consensus of Rp8.8trn and 25% higher than Stevanus Juanda’s number. If we assume the 2Q10 core net income of Rp1,746bn is sustained in Q3 and Q4, full year core net income can reach around Rp6.7trn – this is 5% higher than consensus of Rp6.4trn and 22% higher than Stevanus Juanda’s number. Bottom-line: concerns on 2011 outlook appear unfounded as forecast for the base year (2010) is being revised upward; the stock trades on attractive P/E multiple of 14.5x FY10 with a 3-4% dividend yield. The stock may re-rate on the back of a continuing decline in Indonesia 10YR government bond yield.


Mandiri Sekuritas PGAS:65.7% gross margin post tariff hike TP IDR5260
15% increase in gas price effective April 1, 2010 subdued lower distributed gas volume (-3.3%QoQ) and giving 12.7% qoq increase in revenue and 16.4% QoQ in operating profit. Post the impact of increase, no short-term catalysts until mid-2012 where PGAS expected to have 180MMSCFD (equity accounted) new supply from West Java FSRT JV with Pertamina. We upgraded our estimates on lower than estimated COGS, resulted in new target price of Rp5,260/share. Admittedly, catalysts are limited, and therefore news on progress in the FSRT project are much needed.

A thicker margin. PGAS recorded a gross margin of 65.7% in 2Q10, up from 60.8% in 1Q10, and 59.3% in 1H09. An increase in average gas price of 8.6% in Q2 to US$6.84/MMBTU helped beefed up the margin. 20% composition of IDR in PGAS tariff resulted in higher ASP in USD terms compared with US$6.3/MMBTU, PGAS indicated. Transmission and fiber optics was up 8.5% QoQ to Rp424bn.

No short-term catalysts seen. PGAS is currently implementing a thorough FSRT (Floating Storage Regasification Terminal) tendering process to avoid any tender dispute. Due to this, a discount have to be applied for the 2012 target of completion to prevent over optimistic expectation. There were also scant progress in gas fields’ acquisitions and additional supplies from gas producers. PGAS CEO, Hendy P. Santoso quoted by Bloomberg, said that he saw limited additional supply in 2011

Rising target price. We revised down our cost of gas on improved gas supply from Conoco Phillips (CoPhi). As CoPhi volume has improved, cost of gas have to be lowered since CoPhi’s gas is priced at US$1.85/MMBTU which is lower than average cost of gas of US$2.53/MMBTU. Our new target price of Rp5,260/share is 13.1% higher than our previous target price.


CLSA PGAS, Lack of catalysts – Downgrade to OPF, from Swati
Indonesia has massive gas reserves but yet a big deficit of gas supply (Domestic gas price now almost double of Henry Hubs). PGAS has been one of the best structural story being in the forefront of delivering stranded gas to gas hungry island of Java. However, the structural story (lack of gas supply) has recently been a bit of a doubled edge sword for gas. Its simply cannot secure any meaningful gas supply contract when demand is surging. LNG receiving terminals is a great solution but unfortunately still 3 years away. With the domestic consumption story taking off in Indonesia, PGAS will have limited operating leverage to benefit. Still great LT story at reasonable valuation but status quo (note we have not change our earnings forecast) means underperformance in the meantime. Patience required.
· PGas is a structural growth story of Indonesia’s shift to gas often marred with execution disappointments.
· We expect material new gas supply only in 2013 when LNG comes on-stream. There could be further delay on this as it will take 24-36months to complete the LNG project from date it’s commenced. Pgas has not signed any firm gas contract for LNG.
· We expect new contracts (piped and LNG receiving terminal to be signed in next six months but this does not mean actual gas supply will increase before 2012 as it takes time to monetize gas.
· We downgrade the stock to outperform in absence of any price and volume growth in foreseeable future. That said, we are not turning negative (although less positive) as the stock is cheap, trading at 10.7x 2011CL, with a solid balance sheet, 45% ROE, 22% ROA and 5.6% div yield.
· The stock should re-rate on progress of LNG receiving terminal and new volume contracts.


NISP Perusahaan Gas Negara sets 2011F capex at US$600mn
· Perusahaan Gas Negara is budgeting US$600mn or Rp5.58tn for capex in 2011. This is almost 3 times of the capex this year, which ranges between US$200-250mn.
· PGN CEO, Mr.Hendi Prio Santoso, states that the budget includes acquisition cost for an oil and gas block of US$350mn in response to the growing demand. In addition the company will acquire a gas tank costing US$50mn.
· Capex will 30% be financed from internal cash. The company has currently Rp9.53tn in cash. The balance will be sourced externally however no details have been shared.
· PGAS is trading at 2011F PER of 12.3x and EV/EBITDA of 7.4x.


DBS Perusahaan Gas Negara: Strong 2Q earnings TP Rp4,800
At a Glance
• 2Q10 results in line with expectations
• On track to meet target sales volume and forecasts
• New gas supply contract supports higher volume and tariffs
• Promising outlook but trades at discount to regional peers’ valuations
• Maintain Buy and TP of Rp4,800, with 20% upside.

Comment on Result
2Q revenue grew 11% y-o-y to Rp5t.0tr on 9.3% and 11% increases in gas distribution and transmission volume to 827 MMScfd and 847 MMScfd, respectively.

2Q EBIT improved by a stronger 27% y-o-y to Rp2.5tr helped by 6ppt increase in operating margin following an average 15% hike in gas price for industrial and commercial users in Indonesia effective 1 April 2010. 2Q net profit (excluding forex loss on loan translation) grew by an even stronger 66% y-o-y to Rp1.6tr supported by both higher volume and tariff rates.

Outlook for PGAS is promising given its recent new gas supply contract with ConocoPhillip from Grissik field. Given PLN ’s urgent need for gas, we expect more new supply to come trough over the next few months. We estimate that every 10ppt increase in gas supply will boost PGAS FY10F net earnings by 11.4%.

Recommendation
PGAS is poised to benefit from Indonesia’s rising energy demand fuelled by strong economic growth and rapid infrastructure development. Maintain Buy and DCF-derived target price of Rp4800. PGAS is trading at attractive 12x FY11F PE versus peers’
average of 17x, despite its more promising growth prospects. It also offers higher net dividend yield of 4% versus regional peers’ average of 2%.


Credit Suisse: Perusahaan Gas Negara - Strong 2Q10 results on higher selling prices TP idr5,300
● PGAS posted 2Q10 recurring net profit of Rp1,885 bn, up 35% QoQ and 56% YoY mainly due to higher selling prices. Its reported net profit of Rp1,435 bn in 2Q10 declined 19% QoQ and 27% YoY due to forex and derivative losses.
● The recurring net profit was above our expectation, at about 53% of our 2010 forecast (and 51% of the consensus estimate), as we expect a better 2H10. Gas ASP of US$6.83 in 2Q10 was above our forecast of US$6.4, while the average gas blended cost of US$2.54 was in line with our 2010 forecast. The positive impact of higher ASP was partially offset by weaker 2Q distribution volumes of 813 mmscfd, down 3% QoQ.
● We expect higher distribution volumes in 2H10 due to a recovery in Conoco volumes. Since June 2010, Conoco volumes have recovered to an average of 340 mmscfd, versus its 2010 contract of 350 mmscfd.
● We increase our forecast for average realised selling price to US$6.6/mmbtu, based on higher realised selling prices achieved in 2Q10. We maintain our positive view and our OUTPERFORM rating on PGAS and our DCF-based target price of Rp5,300.