Perusahaan Gas Negara Within Expectations

PGAS’s 9M13 forex and derivative gains offset its slightly lower-than-expected distribution volume, bringing 9M13 earnings to USD642m (+3.3% y-o-y) or 76% of our and consensus estimates each. Its share price has declined, due to recent investor sentiment over the open-access policy that could threaten its dominance in the distribution business. Maintain BUY, with a lower DCF-based TP of IDR6,000 as we pare our LT growth rate assumption.

3Q13 financial highlights
Perusahaan Gas Negara (PGAS)’s 3Q13 revenue dipped 6.7% q-o-q on the back of a 4.9% decline in distribution volume, given the seasonal factors in the Ramadhan month. 3Q13 COGS fell 10.8% q-o-q as there was an operational cost hike in 1H13 from its gas block acquisitions. This pushed its gross margin to 47.8% in 3Q13 from 45.4% in 3Q12. Earnings for 3Q13 decreased by 0.2% q-o-q and 12.9% y-o-y, bringing 9M13 earnings to USD642m (+3.3% y-o-y), accounting for 76% of both our and consensus estimates respectively.

Upstream O&G block an upside risk to our earnings estimate
Its subsidiary Saka Energi Indonesia began booking revenue from its 25% participating interest in the Pangkah block in July, amounting to USD27m. The Ketapang and Bangkanai blocks are expected to start production by end-2014. This presents an upside risk to our estimate as we have not factored its potential earnings into our model yet.

Outlook
We expect PGAS’ distribution volume to pick up in 4Q13 given the typical upswing post Ramadhan. Despite concerns over rising inflation and the weakening IDR/USD rate after the subsidized fuel price was increased back in June, the demand for gas remains stable. The possible implementation of the open-access gas pipe policy resulted in negative investor sentiment over the stock. This may threaten PGAS’ dominance in the gas distribution business. It is worth noting that the Government recently announced that the implementation of the open-access pipe policy will be delayed until further notice.

Maintain buy
We maintain our BUY call but lower our DCF-based TP to IDR6,000 from IDR6,500, as we lower our long-term growth assumption from 6% to 5% on the back of its lower business growth visibility.