KI: PGAS - Fairly Valued

PERUSAHAAN GAS NEGARA – TP6,300/sh (HOLD)

Fairly Valued



Rising distribution volume from LNG and Conoco Phillips

In the past 3 years, PGAS' distribution volume has been stagnant, growing by only 1% CAGR in FY09-FY13 on the back of gas supply constraint. However, starting this year, the supply outlook will be much brighter as Conoco Phillips already ramped up their gas lifting and committed to supply more volume to PGAS post the contract re-negotiation. Moreover, PGAS' new LNG re-gasification unit has entered commissioning phase and will start adding around 15mmsfcd gas in 2014F before gradually ramping up into its maximum capacity of around 300mmscfd in 2017F. With the much secured gas supply, we foresee PGAS' distribution volume will grow by 9.6% CAGR in the next 3 years with gas from LNG contributing around 21% of its total volume in 2016F.



Welcoming the upstream business contribution

PGAS' recent initiatives to go upstream by acquiring several oil & gas blocks have come to bear fruit. Revenue from upstream business reached US$151.8 mn in 1H14, contributing around 9% of its total revenue with gross margin of 47.3%. The upstream business revenue solely came from Pangkah block which has been fully acquired since Jan '14. We expect the revenue contribution from upstream business will reached 11.1% in FY14 before increasing to 12.2% in FY16 with sustainable gross margin of 45% and CAGR of 22% over the next 3 years outperforming its core business CAGR of only 17%.



Appealing top-line growth but at the expense of profitability

With the two aforementioned drivers, PGAS' revenue growth outlook looks compelling at 17.8% CAGR in FY13-16F Vs. only 11% CAGR in FY10-FY13 period. However, PGAS' strong top line growth is not without problem as it arises at the expense of PGAS' profitability. We expect that the distribution business' cash margin will subside along with bigger supply contribution from Conoco Phillips, as it incur most expensive purchasing price compared to the other suppliers. Moreover, the additional gas from LNG re-gasification unit also has a lower cash margin of only around US$2.5/mmbtu. As a result, we forecast PGAS' blended cash margin will erode to around US$3.6/mmbtu in '14F-'15F before decrease further to US$3.4/mmbtu in the longer term. This translating into a lower gross margin of 36%/30% in '15F/'17F compared to 53.3%/43.5% in FY12/FY13.



Un-exciting earnings growth of only 4.5% CAGR in '14F-16F

We fine-tuned our estimate to factoring in the lower cash margin assumptions for distribution business and incorporating the contribution of PGAS' upstream business. As a result, our revenue estimate is tweaked up by 10.4%/12.9% for '14F/'15F while our bottom line numbers were down by 6%/3.2%. Under the new estimate, PGAS' core earnings will only grow by 4.5% CAGR in '14F-'16F, slightly higher than the 3.8% CAGR in FY11-'14F.



Fairly valued; Rating reduced to Hold

PGAS' share price has risen by 33% ytd and outperforming JCI by around 12.6%. This has brought its fwd-PE from as low as 11.4x in Jan '14 into currently 15.5x, slightly below its +1std.dev average of 16x. We remain to be fond with PGAS' defensive business nature and strong revenue growth outlook, but seeing the company's sluggish earnings growth will somewhat limit PE re-rating potential. We revised down our SOTP-based TP to Rp6,300/share following earnings revisions and we downgrade our recommendation for PGAS to HOLD on limited upside potential from current share price.