Company update:
Perusahaan Gas Negara (PGAS IJ; BUY; TP: IDR4,000)
Set For a Reversal Of Fortune
Perusahaan Gas Negara (PGAS IJ; BUY; TP: IDR4,000)
Set For a Reversal Of Fortune
The
pressure on PGN’s distribution margins, stemming from competing feedstock, is
set to reverse. This is because the overhang on its stock from worries over the
gas price cut overhang has been removed, while coal prices have doubled since
early 2016 and crude oil prices are on the rise. With no more asset impairments
in hand, PGN’s E&P segment’s operating margins could be lifted by the rise
in crude oil prices. Overall, we expect gross margins to improve. Maintain BUY
and DCF-based IDR4,000 TP ( also implying 15x FY17F reported earnings.
¨ No impact from the
gas price cut.
On 5 Dec, the Government announced that the natural gas tariff for
three priority sectors in the upstream segment – fertiliser, steel and
petrochemicals – would be cut by USD0.50-1.50/mmbtu. Only five companies stand
to benefit from the lower tariff, of which two would also receive lower
transmission fees from Pertamina Gas. These companies are big volume gas users
and buy the commodity directly from oil & gas blocks, bypassing distributors
such as Perusahaan Gas Negara (PGN).
¨ No definite date for
further price intervention. The tariff cut was lower than what was announced
earlier. Also, the ceramic, glass, oleochemical and rubber glove industries
would also not benefit from the lower tariffs. Energy and Mineral Resources
Deputy Minister Mr Archandra Tahar stated that, in the event of a similar
reduction in gas tariffs, these sectors – which use natural gas for power
generation only – would have a lower multiplier impact on the economy. This is
in comparison with the fertiliser, steel and petrochemical industries, which
also use natural gas as a raw material. Thus, the decision to not lower tariffs
on these sectors at this juncture, in view of the impact to the Government’s
budget.
¨ Sentiment should
shift towards fundamental/recovery potential. While talk of a Pertamina merger
still linger, (see our 30 Aug A
Study Of PGN, Pertamina And Pertagas report), we believe the most
detrimental factors, ie distribution margins or potential margins compression
from the gas price cut, is largely over. We believe fundamental variables, such
as gas distribution volumes and distribution margins recovery, as well as the
recovery potential of its troubled E&P and LNG segments, are likely to
drive its share price. And these factors are turning towards PGN’s favour, in
our opinion.
¨ Rising crude oil
prices and higher coal price bodes well for PGN. As coal prices have
doubled and crude oil prices are on the rise, PGN’s appeal (as natural gas is a
competing feedstock) ought to increase. This, in turn, would reverse the
pressure on its distribution margin. In our opinion, PGN should maintain its
ex-LNG pipe gas distribution margin of USD3.00/mmbtu, this might even improve
in FY17 should volumes recover and surcharges reappear. With 2017 crude
assumption of USD44.50/bbl, Its E&P segment’s impairment is done, while
operating margins would benefit from higher ASP.
¨ Downside risks. PGN is now trading
at 11x of our FY17F reported net profit, vis-à-vis its 5-year historical mean
of 13x. Downside risks to our call are still an intervention from the
Government, which may put pressure on margins, as well as an unfavourable
outcome from the merger with Pertamina.
Kindly click the following link for the full report: Perusahaan Gas Negara : Set For a Reversal Of Fortune
Norman Choong, CFA
Assistant Vice
President
Research Analyst – Utilities,
Oil & Gas, Poultry
PT. RHB Securities
Indonesia
