R e g i o n a l M o r n i n g N o t e s Tuesday, 16 October 2018

COMPANY UPDATE HOLD

Perusahaan Gas Negara (PGAS IJ) (Maintained)
Expect Stronger 3Q18 Earnings On Higher Volume And Oil Prices Share Price Rp2,040
We gather that gas distribution volume is likely higher in 3Q18 than in 1H18, Target Price Rp2,220
primarily supported by stronger demand from the industrial segment. Higher crude Upside +8.8%
oil prices in 3Q18 could also offset the lower lifting volume due to expiry of two PSC (Previous TP Rp2,050)
contracts. The Pertagas acquisition is targeted to be completed in Nov-Dec 18 but
the financing structure remains an overhang on share price. Maintain HOLD with a COMPANY DESCRIPTION
higher target price of Rp2,220. Entry price: Rp2,000. Largest and integrated natural gas
transmission and distribution company with
WHAT’S NEW nearly 7,500km pipeline network. PGAS also
• Higher gas distribution volume... We gather that Perusahaan Gas Negara’s (PGAS) has participating interests in PSC and
operates oil and gas blocks across Indonesia.
3Q18 gas distribution volume would likely remain at above 800mmscfd, mainly supported
by strong demand from the industrial segment; while volume from the power sector would STOCK DATA
likely have remained flat. The gas distribution volume might be higher than the GICS sector Utilities
836mmscfd in 1H18. Bloomberg ticker: PGAS IJ
• ...could lead to stronger earnings in 3Q18. PGAS’ 3Q18 earnings will mainly be Shares issued (m): 24,241.5
supported by higher gas distribution volume and higher crude oil prices. Profit margins Market cap (Rpb): 51,392.0
would also improve, given the higher gas volume contribution from the industrial segment Market cap (US$m): 3,381.7
and higher oil prices. The main risk to our earnings estimate is the expiry of two PSC 3-mth avg daily t'over (US$m): 10.6
contracts - the Sanga-Sanga PSC contract in early-August and the Southeast Sumatra
Price Performance (%)
(SES) PSC in September. These two blocks constituted around 15% of SAKA Energi’s
52-week high/low Rp2,720/Rp1,525
revenue historically.
1mth 3mth 6mth 1yr YTD
• Further clarity on Pertagas acquisition but overhang remains. PGAS announced that 3.9 30.9 (9.8) 33.3 21.1
funding for its acquisition of a 51% stake in Pertagas would be via 50% cash and 50%
Major Shareholders %
promissory notes. The cash payment is likely to take place in Nov-Dec 18 and the
Republic of Indonesia 57.0
company has sufficient cash. However, the overhang is on the remaining 50% payment.
PGAS could face difficulty in obtaining new debts, considering the high acquisition cost FY18 NAV/Share (US$) 0.14
which could increase its net debt-to-equity to 0.8x (from 0.43x in 2017) and downgrade FY18 Net Debt/Share (US$) 0.11
PGAS’ credit profile. Alternative options would be through a rights issue or shareholders’
loans, and this might cap the upside for share price in the short term. PRICE CHART
• Slightly benefitting from a stronger dollar. This is mostly due to the savings on its (lcy)
PERUSAHAAN GAS NEGARA PERSER
(%)
PERUSAHAAN GAS NEGARA PERSER/JCI INDEX

operating cost (mostly labour) that could translate into higher earnings. Our back-of-the- 2800 170

2600 160
envelope calculation shows that 2018 net profit could be 3-4% higher than our base
150
2400
estimate should the rupiah average at Rp15,000/US$ this year. A stronger US$ will also 140
2200
translate into higher valuation for PGAS’ share price. 130
2000
120
1800
110
1600
KEY FINANCIALS 100

1400 90
Year to 31 Dec (US$m) 2016 2017 2018F 2019F 2020F 800
Net turnover 2,935 2,970 3,173 3,508 3,619 600 Volume (m)
400
EBITDA 769 834 963 1,008 1,055 200
Operating profit 444 377 487 490 490 0

Net profit (rep./act.) 304 143 252 224 231 Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18

Net profit (adj.) 304 143 252 224 231

EPS (US cent) 1.3 0.6 1.0 0.9 1.0 Source: Bloomberg
PE (x) 11.1 23.6 13.4 15.1 14.6
P/B (x) 1.1 1.1 1.0 1.0 1.0 ANALYST(S)
EV/EBITDA (x) 7.8 7.2 6.2 5.9 5.7 Edward Lowis
Dividend yield (%) 5.0 4.0 1.9 3.4 3.0 +6221 2993 3917
Net margin (%) 10.4 4.8 7.9 6.4 6.4 edwardlowis@uobkayhian.com
Net debt/(cash) to equity (%) 50.5 43.1 78.3 70.6 56.4
Interest cover (x) 6.7 6.4 7.5 5.6 6.2
ROE (%) 9.8 4.5 7.8 6.7 6.6
Consensus net profit - - 241 263 331
UOBKH/Consensus (x) - - 1.05 0.85 0.70
Source: PGAS, Bloomberg, UOB Kay Hian

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R e g i o n a l M o r n i n g N o t e s Tuesday, 16 October 2018

STOCK IMPACT 3Q18 GAS DISTRIBUTION VOLUME TO REACH 4-

YEAR HIGH
• Limited forex risks from existing debt. Most of PGAS’ debts are in US dollar and only 1,000 4.5
around 15% of total debt is in yen. These long-term yen loans (due in 2043) are used to 900 4.0
finance the building of a gas transmission pipeline from South Sumatra to West Java and 800 3.5
a gas distribution pipeline in West Java, hence we can expect most of the interest 700
3.0
expense to be capitalised. 600
2.5
500
2.0
• PGAS-Pertagas infrastructure integration to start this year. PGAS will begin the 400
1.5
integration process this year and aims to have three interconnection points by Dec 18. 300
200 1.0
Management expects the synergy from this infrastructure integration to start contributing
100 0.5
in 3Q19.
- 0.0

1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
EARNINGS REVISION/RISK
• Raise earnings forecasts. We raise our 2018-19 net profit estimates by 8% and 5% Distribution volume (MMscfd) Gas margin (US$/MMBTU)

respectively as we increase our gas distribution volume assumption to 845mmscfd for this Source: Perusahaan Gas Negara, UOB Kay Hian
year (from 825mmscfd) and gas spread to US$2.35/mmbtu (from US$2.30/mmbtu).
PERTAGAS ACQUISITION THROUGH NEW DEBT
REVISED FORECASTS ISSUANCE LIKELY TO INCREASE PGAS’ NET DER
----- New ----- ---- Original ---- --- Diff (%) --- ---- Street --- --- Var (%) --- TO 0.8X
(US$m)
2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 2018F 2019F 0.9 14
Revenue 3,173 3,508 3,114 3,510 2 0 3,190 3,441 -1 2 0.8 12
Gross profit 919 959 887 943 4 2 854 937 8 2 0.7
10
0.6
EBITDA 963 1,008 933 991 3 2 862 905 12 11 8
0.5
Net income 252 224 234 214 8 5 241 263 5 -15 0.4 6
EPS (Rp) 0.010 0.009 0.010 0.009 8 5 0.010 0.011 5 -15 0.3
4
0.2
2
Gross margin 29% 27% 28% 27% 27% 27% 0.1
- 0
EBITDA margin 30% 29% 30% 28% 27% 26%
2014 2015 2016 2017 2018F 2019F
Net margin 8% 6% 8% 6% 8% 8% Net debt-to-equity (x) Interest coverage
Source: UOB Kay Hian, Bloomberg Source: Perusahaan Gas Negara, UOB Kay Hian
• Strong earnings recovery in 2018. We expect 2018 net profit to increase 75.9% yoy to PGAS CURRENTLY TRADES AT -1SD OF 5-YEAR
US$252m on the back of higher gas volume and strong earnings contribution from its MEAN PE; WOULD REQUIRE STRONGER
upstream unit. Unfortunately, 2019 net profit could decline 11% yoy due to higher interest CATALYST TO RE-RATE FURTHER
expense from the new loans for the Pertagas acquisition despite improvement in 35

operation. 30

VALUATION/RECOMMENDATION 25

20
• Maintain HOLD with a slightly higher target price. We roll over valuation and maintain
15
our HOLD call as we expect the complexity of the financing scheme for acquiring a 51%
stake in Pertagas would continue to cap share price upside in the short to medium term. 10

Our target price of Rp2,220 is based on 16x 2019F PE, or -1SD of the stock’s five-year 5
mean PE. Entry price is Rp2,000. Jan Jun Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun
13 13 13 14 14 15 15 15 16 16 17 17 18 18

-2STDEV 10.9x -1STDEV 15.8x Average 20.7x

1STDEV 25.5x 2STDEV 30.4x PGAS IJ

Source: Bloomberg, UOB Kay Hian

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R e g i o n a l M o r n i n g N o t e s Tuesday, 16 October 2018

PROFIT & LOSS BALANCE SHEET

Year to 31 Dec (US$m) 2017 2018F 2019F 2020F Year to 31 Dec (US$m) 2017 2018F 2019F 2020F
Net turnover 2,969.6 3,173.4 3,508.3 3,619.1 Fixed assets 3,301.3 4,610.3 4,350.3 4,044.9
EBITDA 834.3 962.6 1,007.6 1,055.1 Other LT assets 1,183.8 1,169.9 1,292.5 1,333.3
Deprec. & amort. 457.2 475.4 517.2 564.6 Cash/ST investment 1,026.3 336.3 508.9 915.3
EBIT 377.0 487.2 490.5 490.5 Other current assets 781.7 787.0 916.5 916.7
Total other non-operating income (10.1) 0.0 0.0 0.0 Total assets 6,293.1 6,903.5 7,068.2 7,210.1
Associate contributions 38.5 65.0 68.3 71.7 ST debt 22.9 48.2 70.3 55.7
Net interest income/(expense) (129.9) (128.2) (178.4) (169.3) Other current liabilities 443.8 391.9 434.7 435.2
Pre-tax profit 275.6 424.0 380.3 392.8 LT debt 2,369.7 2,872.9 2,847.1 2,857.9
Tax (127.8) (169.6) (152.1) (157.1) Other LT liabilities 269.9 278.9 291.1 303.8
Minorities (4.6) (2.5) (4.2) (4.7) Shareholders' equity 3,168.2 3,301.8 3,412.4 3,542.6
Net profit 143.1 251.8 224.0 231.0 Minority interest 18.8 9.9 12.7 14.9
Net profit (adj.) 143.1 251.8 224.0 231.0 Total liabilities & equity 6,293.1 6,903.5 7,068.2 7,210.1

CASH FLOW KEY METRICS

Year to 31 Dec (US$m) 2017 2018F 2019F 2020F Year to 31 Dec (%) 2017 2018F 2019F 2020F
Operating 555.8 772.2 613.1 841.2 Profitability
Pre-tax profit 275.6 424.0 380.3 392.8 EBITDA margin 28.1 30.3 28.7 29.2
Tax (127.8) (169.6) (152.1) (157.1) Pre-tax margin 9.3 13.4 10.8 10.9
Deprec. & amort. 457.2 475.4 517.2 564.6 Net margin 4.8 7.9 6.4 6.4
Working capital changes (61.7) (57.2) (86.7) 0.3 ROA 2.2 3.8 3.2 3.2
Other operating cashflows 12.5 99.6 (45.5) 40.6 ROE 4.5 7.8 6.7 6.6
Investing (197.0) (1,863.7) (326.3) (332.6)
Capex (growth) (162.8) (225.0) (226.3) (227.6) Growth
Capex (maintenance) (75.6) (1,638.7) (100.0) (105.0) Turnover 1.2 6.9 10.6 3.2
Investments 41.0 0.0 0.0 0.0 EBITDA 8.5 15.4 4.7 4.7
Others 0.4 0.0 0.0 0.0 Pre-tax profit (28.4) 53.9 (10.3) 3.3
Financing (636.6) 401.4 (114.2) (102.3) Net profit (53.0) 75.9 (11.1) 3.1
Dividend payments (136.7) (64.4) (113.3) (100.8) Net profit (adj.) (53.0) 75.9 (11.1) 3.1
Issue of shares 0.0 1,165.0 0.0 0.0 EPS (53.0) 75.9 (11.1) 3.1
Proceeds from borrowings (510.1) 528.5 (3.6) (3.8)
Others/interest paid 10.3 (1,227.7) 2.8 2.2 Leverage
Net cash inflow (outflow) (277.7) (690.1) 172.7 406.3 Debt to total capital 42.9 46.9 46.0 45.0
Beginning cash & cash equivalent 1,304.0 1,026.3 336.3 508.9 Debt to equity 75.5 88.5 85.5 82.2
Ending cash & cash equivalent 1,026.3 336.3 508.9 915.3 Net debt/(cash) to equity 43.1 78.3 70.6 56.4
Interest cover (x) 6.4 7.5 5.6 6.2

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R e g i o n a l M o r n i n g N o t e s Tuesday, 16 October 2018

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