Rukun Raharja Company Visit (2014)

Company background
RAJA is a gas distribution & transmission company with a market share of around 5% (based on my calculation) on the gas distribution business and is the largest non-SOE player in the gas distribution industry. It has a relatively similar business model compared to Perusahaan Gas Negara (PGAS IJ, BUY, TP: IDR6,600) only on a smaller scale. RAJA had its back-door listing back in 2010 by acquiring PRA (99%) and TIP (99%) with intentions of entering the gas sector.

A beneficiary of the rise in gas infrastructure
RAJA’s business expansion plan which is moving towards gas pipe expansion, LNG infratructure and downstream O&G assets are relatively similar compared to PGAS expansion plan as both are reaping opportunities towards the nation’s need of rise in gas infrastructure coupled with the rise in nautral gas demand as to replace the relatively expensive fuel price used for power plants and industrial usage.

Note that the industry’s conventional gas pipeline distribution price to RAJA’s and PGAS’ customers at USD9-12/mmbtu and liquefied natural gas (LNG) charged at USD16-18/mmbtu, are still way cheaper at 48%-71% discount to oil-related products which are above USD32/mmbtu.

New faces on board = strengthening b to b ties?
3 months ago on 11 Jun 2014, two new faces joined the company holding the commissioners board positions which are Rudiantara (replacing Hapsoro, the husband of Puan Maharani – PDI-P linked) and Rachmat Gobel. The company feels that Rudiantara possess comprehensive knowledge and strong networks in the power plant (PLN) business. Note that 60% of RAJA’s gas distribution revenue goes to power plant customers (dominated by PLN).

Meanwhile, Rahmat Gobel (known for his Panasonic Gobel Indonesia empire), which is the President of The Indonesian-Japan Friendship Association, should bring stronger ties with foreign partners in getting future potential financing, technology, and knowledge sharing. Take a note that RAJA cost of debt is ~7% with 95% mostly in USD vs PGAS’ 3.96% cost of debt with 79% in USD and 21% in JPY. We sense that RAJA wants to push its professional and competent reputation image to the eyes of investors.

Strong production ramp-up
2014-15 distribution volume should increase by 53% and 13% y-o-y amounting to 66mmscfd and 74mmscfd respectively. The strong distribution volume growth is mainly driven by strong additional gas supply from Conoco Phillips in Jambi (contract untill 2018). It is worth noting that its distribution segment accounts around 90% of its total revenue. As RAJA’s installed gas distribution capacity is at 167 mmscfd with utlization rate of only 26%, 39% and 44% for 2013-14-15 respectively, suggests no capex needed for distribution volume ramp up.

Margin spread
Margin spread ((selling price – upstream gas price)/selling price) for RAJA is around 1 – 1.5/mmbtu, very low if compared to PGAS margin spread of around USD3 – 3.5/mmbtu (PGAS margin spread is high because they have long-term contracts with old gas price).

Capex
The company expects the most visible 2014-15 total capex to be USD44m for building CNG plant and transmission pipelines. Although there are upside potential on other projects to come in line within the same period. Tahun berikutnya

Earnings target
The company expects 2014 revenue to be USD203m and 2014 net profit to be USD7.4m. This translates to 2014x PER.