Perusahaan Gas Negara In Line, more exposure from E&P segment

2Q14 core profit reached USD201m (+11.3% q-o-q, 23.5% y-o-y), bringing 1H14 core profit to USD381m (+2.6% y-o-y), contributing 49% to our FY14 core profit estimate of USD786m (+5.4% y-o-y). PGAS’ riskier profile from higher contribution from its E&P business segment contributes higher margin mix, bringing 2Q14 operating profit hiked 21.4% q-o-q with higher 33% blended operating margin compared to 28% in 1Q14. Maintain BUY with our SOTP based TP of IDR6,600.

Strong contribution from non-gas distribution
2Q14 revenue increased 2.4% q-o-q to USD862m, mainly driven by the strong contribution from the exploration and production (E&P) segment amounting to USD85m (+25.8% q-o-q), offseting the flat performance from its gas distribution segment. Gross margin significantly increased to 46.0% in 2Q14 from 40.3% in 1Q14 given higher gross margin mix arousing from its E&P segment (1Q14/2Q14 at 11%/71%) and improved gross margins from its transmission segment (1Q14/2Q14 at 7% and 15%).

Higher net gearing
In May, PGAS obtained USD1.35bn worth of senior unsecured bonds as part of its attempt to acquire E&P assets and expand its natural gas pipelines. With 1H14 total interest-bearing debt of USD2.4bn, PGAS’ net gearing stood at 28.2%, highest ever since 2009. Note that PGAS alllocated capex amounting to USD681m in 1H14, 40% of our FY14 capex estimate of USD1.7bn.

Outlook
We think that PGAS’ higher gearing level and increased exposure to higher risk business profiles (E&P segment) is justified in our view as to secure long-run gas supply as part of the nation’s attempt to replace oil-related products to gas given that it is cheaper and cleaner.

Valuation
We maintain our 2014-14 earnings forecast at this current juncture. We also maintain our BUY call ad maintain our SOTP-based TP of IDR6,600, implying 15x 2015 PER.