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Sunday, October 30, 2011

PT. Perusahaan Gas Negara (PGAS) - 3Q11 Losses In Derivative and Forex

by Kresna Securities

Investment Thesis

While PGAS' 9M11 revenue and operating profit did meet our expectations, arriving at 75.3% and 72.4% to FY11E, respectively, their bottom line sustained considerable damage from 3Q11 losses in derivative and forex, resulting in a 9M11 figure that only meets 68.7% of our FY11E. Considering this, we cut our FY11E figures by 11.0% to Rp6.1tr. For 2012F, we increase our net profit forecast by 9.5%, following company's decision to raise prices in East Java. Valuation wise, we shift the methodology used to P/E along with the market volatility. We set our P/E target at 13.8x (average 2006 – now), thus resulting a new 12-month TP of Rp3,900.

Key Catalysts

Revenue slipped 2.6% YoY to Rp14.2tr. The 7.2% YoY distribution price growth was not enough to sustain top line performance, given Rp appreciation and declining distribution volume. In 9M11, Rp has appreciated by 4.6% YoY to an average of Rp8,701/US$ from Rp9,123/US$ in 9M10. Meanwhile, government's decision to divert PGAS' gas supply to supplement national oil production has pressured company's distribution volume, down by 4.4% YTD to 785MMSCFD, with 3Q11 figure only improved by a meager 0.8% QoQ to 791MMSCFD.

Operating margin down by 5.2% YoY to 42.7%. Despite lower volume flowed, cost of revenue increased by 0.7% YoY, as it paid higher purchase price and signed new contract at higher fees; the 9M11 average purchase price was US$2.7/mmbtu versus US$2.5/mmbtu in 9M10. Meanwhile, operating expenses also increased significantly, up by 22.4% YoY, as asset depreciation, salary expenses and allowances for impairment losses recorded a considerable leap of 12.6%, 25.5% and 233.0% YoY in 9M11, respectively.

Below operating figures turned red in 9M11. PGAS suffered additional pressure from non-operating accounts. In 3Q11, it posted humongous loss in the fair value (FV) of derivatives and foreign exchange (FX) of Rp675bn, due to strong appreciation of US$ and JPY against Rp, thus washing away all the Rp268bn gain booked in 1H11. As such, PGAS booked Rp407bn loss in FV of derivatives and FX in 9M11.

Gas price increase in East Java. PGAS decided to increase its distribution price for industrial and commercial customers in East Java by 36% from a current US$6.5/MMBTU, starting next year. Management hopes that this initiative can mitigate the impact of rising gas purchase price (in June11).

Operational level was in line with our estimate. Revenue to operating level meet our expectations, arriving at 75.3% and 72.4% to our FY11 estimates of Rp18.8tr and Rp8.4tr, respectively. However, net income was below expectations, as it is only accounting for 68.7% to our FY11 target of Rp6.8tr, given the unexpected negative turnaround in the FV of derivative and FX to Rp400bn in 9M11. Thus, we incorporate the loss to our model, resulting 11.0% cut to our FY11E net income to Rp6.1tr.

Impact of the gas price increase to our FY12 forecast. PGAS aims to flow around 100MMSCFD of gas in East Java, or 12%-13% of the total distribution volume target this year. By incorporating the impact of a higher price in East Java, we may see a 4.5% upside in distribution price (on a blended basis), thus leading to a 4.0% and 8.0% rise in our FY12 revenue and net profit forecast, respectively.

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