Friday, September 23, 2011

PT. Perusahaan Gas Negara - Higher Gas Cost but Valuation still Attractive

by Batavia Prosperindo Sec

• Lower performance in 1H11

The company (PGAS) booked 1H11 revenue and operating profit of Rp 9.41 trillions and Rp 4.1 trillions, lower than 1H10’s of Rp 9.5 trillions and Rp 4.6 trillions respectively. The changes were due to reduction of distribution volume and increase of gas purchasing price as the company is signing new purchasing contracts and extending existing contracts.

• Renegotiation of gas purchasing price

BP Migas instructed the company to renegotiate the current gas purchasing contracts at below US$ 3 per MMBTU to match the market price, which is around US$5-6 per MMBTU. The company is open for negotiation and we expect the purchasing price to increase to US$5 per MMBTU. Considering the company’s monopolistic business nature, the gas selling price relative to other sources of energy, and resistance from its customers, we assume the company can pass 50% of the cost increase to the customers. More detail information is provided in the following page.

• Construction of LNG receiving terminal as key catalyst

The LNG terminal project is still in progress and we expect it to start operating in 2013. We expect initial distribution volume of 100 MMSCFD and will rise along the years. 2011 total distribution volume is estimated to be 810 MMSCFD and we predict it will increase to 1,270 MMSCFD by 2015.

• Recent sharp drop in stock price offers attractive valuation

Recent weakening of IDR against USD may have the financial report in IDR looked better. Based on the highly-expected increase in gas purchasing price and with the assumptions of 50% dividend payout ratio, 3% terminal growth, and 11.4% WACC, our DCF valuation arrives at target price of Rp 3,200. Despite this significant downward revision of target price from Rp4,900, the recent sharp stock price drop to the current price of Rp 2,400 offers attractive valuation of 34% upside potential.

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