RHB Indonesia - Perusahaan Gas Negara - Improvement On Opex Normalisation And E&P Profit (Perusahaan Gas Negara, Telekomunikasi Indonesia, Mitra Unknown Selasa, 25 April 2017




Good morning,

Perusahaan Gas Negara - Improvement On Opex Normalisation And E&P Profit
We reiterate our BUY recommendation on PGN with unchanged DCF-based TP of IDR3,450 (43% upside). We believe its low annualised ROE of 11.8% – and free cash flow generation that is merely sufficient for capex and dividend payment – should deter any intervention with its ASP. PGN recorded 1Q17 earnings of USD96.8m, 24-28% of our and consensus estimates respectively, driven by lower QoQ opex and higher profitability on oil and gas production.
¨ Distribution segment sees a new norm. Perusahaan Gas Negara’s (PGN) blended distribution spread has stabilised at USD2.60/mmbtu since 3Q16. Its distributed volume of 816mmcfd reflects its new supply agreement to state power producer Perusahaan Listrik Negara’s (PLN) Muara Tawar power plant at a lower price, but higher volume. 1Q17 distribution volume was flat YoY, which shows weak industrial usage, specifically in the textile, ceramic, glass, and cement sector. Transmission volume saw a 14.2% YoY decline, but overall, the impact is small.

¨ Potential intervention on price remains a drag on valuation. We continue to observe pressure from industrial users asking for a lower natural gas price. Recall that in late March, the Ministry of Energy and Mineral Resources was in a discussion to regulate the distribution margin at 7% of upstream gas cost, which poses further downside to ASP. However, PGN has maintained its blended margin guidance of USD2.60-3.00/mmbtu, which we believe is reasonable, as its FY16 free cash flow of USD650m was merely sufficient to maintain its USD500m capex target and usual dividend payout of 40-50%.
¨ Oil and gas lifting to increase by 30% YoY. PGN had earlier guided that its oil and gas lifting target of 30% YoY increased after Muara Bakau started production in 2H17. This segment only broke even in 2016, but recorded a gross profit of USD15m in 1Q17. Due to its low base, PGN earnings have become more sensitive towards the contribution from this segment, while a higher YoY average crude oil price should bode well.
¨ 1Q17 results were above consensus, on the back of 61% QoQ decline in quarterly opex while the oil and gas production segment recorded QoQ gross profit, also compared to gross losses of USD5.5m in 1Q16. Net gearing decreased to 0.43x (4Q16: 0.50x).
¨ Reiterate BUY on undemanding valuation and decent results. PGN now trades at 10.7x FY17F earnings compared to its 5-year historical mean of 13x. Meanwhile, FY17F earnings are set for high double-digit growth, due to the low base effect of FY16. Potential catalysts are a higher crude oil price and improvement in distribution volume to the industrial users. Our DCF TP (WACC: 8.5%, TG: 3%) implies 15x FY17F P/E.
¨ Downside risks would mainly be on the negative news from the potential merger with Pertamina, news flow on this has been quiet since mid-2016. (Norman Choong, CFA)
Link to report: Perusahaan Gas Negara : Improvement On Opex Normalisation And E&P Profit
Link to Daily report: Indonesia Morning Cuppa 250417



Company Update:

Telekomunikasi Indonesia (TLKM IJ, Buy, TP: IDR5,000), update on dividends and telco sector

Telekomunikasi Indonesia has approved a dividend payout ratio of 70% for its FY16 net profit which is higher than last year's 60% payout ratio, this translate into approximately IDR120/share or about 2.7% div yield. We believe this higher payout is of no surprise to market participants but nonetheless another share price and valuation booster after it posted good 1Q17 results with EBITDA/NP grew 15% YoY and 44% YoY respectively. From first glance its net profit outperformance was a combination of lower operating costs and lower quarterly tax rate.
The company has yet to release its info memo on the operational numbers in 1Q17 while results call are scheduled on the 2nd of May so we can't do a detailed analysis yet. However, we believe Telkom's results reinforced ours/consensus bullish view on TLKM's continued dominance in a rather favorable industry landscape, the company still reaps benefit from bulk of the ex-Java voice/data growth while its superior 3G/4G network and brand loyalty allows it stay on top of competition in Java region, sustaining ARPU and healthy subscriber growth.
While strong data traffic growth are expected to continue, we believe data yield decline might stabilised this year (the sector still done well in 2016 with data traffic growth outstripping data yield decline), this means the sector might continue to perform in the medium term. Our view was supported by our recent visit to the Indonesia telcos, where most of them has scaled back on data bonuses, first step to data pricing repair but telcos are still cautious on top of the line data price hike. Our TP (13% upside) implies 8x FY17F EV/EBITDA, we are keeping it pending results call. (Norman Choong, CFA)


Mitra Pinsasthika Mustika (MPMX IJ, NR), Company Visit Highlights
We had a meeting with Mitra Pinasthika Mustika, below is the key highlights;
¨ 1Q17 earnings is likely to increase significantly, underpinned by;
1. Efficiency in rental business line, MPM Rent, on the back of better procurement system which translate into lower acquisition cost for replacement fleet which reaches 2,000 fleet per year.
2. Better performance of MPM Finance, driven by better margin due lower cost of fund.
¨ 1Q17 sales of MPM Auto to remain weak, especially in 4W segment as a result of no new model launching from Nissan and Datsun, and coupled with better penetration of new LCGCs from its competitors.
¨ To lower its balance sheet risk profile, MPMX just completed divestment of some stakes in MPM Finance, which was priced at 1.3x BV. MPMX lowered its ownership to 40% (from previously 60%). Hence, MPMX will not consolidate MPM Finance in 2Q17 financial statement. MPMX received IDR453bn from the divestment which will be used mainly for debts payment, while the remaining are special dividend and new growth business investment.
¨ There are three main growth drivers for this year, including;
1. MPM rent on the back of better procurement and fleet maintenance system. Asides from that, the company to enter intra-city logistic business and it already hired professional for top executive.
2. New federal oil factory which to start commencing in mid-year. The new factory has a capacity of 100m liter/year, double from capacity of existing factory of 45m liter/year. There are also several efficiencies with the operation of new factory because the new factory has a more automated facility that only require half of manpower from existing factory.
3. Post MPM Finance divestment which now the majority is taken by JACCS. JACCS is a financing arm of Sumitomo Mitsui Banking Corporation. Thus, it expects lower cost of fund (CoF) going forward. The reason of divestment is the company want to be focus more on its core business. The divestment funds amounted to IDR453bn will be used for debt refinancing, disburse special dividend, as well as invest in new business.
¨ FY17 guidance: MPMX see that earning to grow by 25% YoY, while revenue to grow by 5% YoY. Lubricant business would be still the company’s cash-cow. Earning growth would be driven by MPM Rental’s lower cost, as well as higher equity income from MPM Finance.
¨ Based on company earning guidance, MPMX is trading at 8.7x FY17F P/E. The company offers ROE of around 8.5% in FY17F which is not too attractive, in our view. We see MPMX needs to proof its sustaining good performance in 2Q17 and onward. (Andrey Wijaya, Ahmad Idham)

1Q17 domestic cement sales volume grew 1% YoY, as expected
In line with our expectation, domestic 1Q17 cement sales increased to 14.8m tonnes (+1% YoY). In our calculation, Semen Indonesia’s domestic market shares rose to 41.4% in 1Q17 (from 40.7% in 4Q16), while that of Indocement’s slightly increased to 25.6% (from 25.5%) in the same period.

Notably, QoQ basis, 1Q17 domestic cement sales volume came lower which we see this likely due to cyclicality. We see that tight competition is likely to continue, given national overcapacity situation. Semen Indonesia lowered its domestic ASP by 1.5% QoQ (to IDR754,000/tonne) to increase its market shares. While, Indocement launched second brand Rajawali to deal with competition from new players.
 ​
We maintain Neutral on Semen Indonesia (TP: IDR9,800, 13% upside) and Indocement (TP: IDR15,700, 2% downside). (Andrey Wijaya)

Media Highlights:

Corporate

Charoen Pokphand (CPIN IJ, BUY, TP: IDR3,700) has announced plan to acquire the local operator of 7-Eleven, Modern Sevel Indonesia, for IDR1trn. The acquisition will be financed using the company’s internal cash reserves, Charoen officials said. Current Modern Sevel’s parent firm, Modern International (MDRN IJ, NR) has admitted that the business suffered losses in recent years as a result of high market competition. (Liputan 6)

Comment: On CPIN's acquisition of 7-eleven Indonesia, we believe the news is share price Neutral to the stock for now. Acknowledged the short-term negative as Modern International, the seller, recorded losses of IDR155bn last year, about 4% of CPIN's FY16 core earnings. However, medium term positive as CPIN can acquire the technical knowhow of improving Indonesia's 7-eleven stores from its Thailand counterpart, CP All runs the 7-eleven chains in Thailand, which was the most successful convenient store in the country, CP ALL is currently reaping gross margins of 24% and ROE in excess of 30% from 9500 7-eleven stores in Thailand.

Competing with Alfamart / Indomaret might be tough at juncture but CPIN should be able to turn around the business and compete head on with Starmart and Family Mart. Hard to gauge on the stress to CPIN's current free cash flows yet as it is dependent on how aggressive was their target, CPIN's poultry capex remains light, at IDR1-1.5tn versus its FY16 EBITDA of IDR3tn. (Norman Choong, CFA)

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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT. RHB Securities Indonesia


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