Perusahaan Gas Negara, In Line, long-term gas demand remains bright

3Q14 net profit reached USD222m (+14.7% q-o-q), bringing 9M14 figure to USD592m (-7.8% y-o-y), in line, comprising 70%/75% of ours/consensus FY14 target. The q-o-q net profit increase is mainly due to forex gain of USD34m in 3Q14 (vs forex loss of USD11m in 2Q14). We see that gross margin squeeze on higher gas cost to persist to 2015. Yet the government’s gas program (switch from oil products) should crystalize visibility on our 2015’s 6.5% y-o-y distribution volume growth.

Revenue and operating profit declined but net income up
3Q14 revenue declined 6.0% q-o-q due to lower distribution segment (-3.8% q-o-q) which booked lower distribution volumes of ~840 mmscfd (-3.8% q-o-q assuming blended ASP flat at USD9/mmbtu compared to 2Q14). 3Q14 operating margin declined to 31.1% vs 2Q14’s 33.0% mainly dragged by lower transmission and lower E&P segments operating margins despite its distribution segment operating margin hiked to 37.8% in 3Q14 vs 33.6% in 2Q14.

Net gearing stable
PGAS issued USD1.35bn bonds in 1H14 with a yield of 5.25% which increased 9M14 average cost of debt to 4.2% (vs 3.96% in 1H14). As a result, 3Q14 interest expense hiked 29.5% q-o-q to USD44m. On a bright note, strong operating cash flow and cash pile abundance justifies PGAS’ leverage position since 1Q14 from its typical known net cash position.

Brewing on a strong gas demand landscape
We expect its FSRU project to commission in 4Q14 supplying around 30mmscfd. This is a testament to Indonesia’s gas demand landscape which will move slowly to liquefied natural gas (LNG) source of gas attainments from current conventional gas pipeline dominance.

Maintain Buy and SOP TP of IDR6,600
This implies 12.8x 2015 P/E with 6% premium to 3-years historical forward P/E. Despite our earnings expectation of only single-digit growth for 2015 (+6.8% y-o-y) and operating margin to consistently decline from 31% in 2013 to 23% by 2018 on higher gas costs, we still depict strong top line visibility to book 12.6% 5-years CAGR from 2013-2018. Indonesia is still far from gas infrastructure maturity, thus a precursor of more gas projects to come.