PGAS BUY UPGRADE TP 2720 (fr 2600)
9M18 results significantly above expectations
Perusahaan Gas Negara reported more than double YoY growth in 9M18 net income to USD218 mn, far above our and consensus expectations at 97-90% of respective FY18F. Strong profit growth was mainly driven by the combined 1) 13% YoY higher in revenue to USD2.45 bn buoyed by 11% increase in gas distribution volume (despite 2.3% lower in ASP to USD8.4 mn), which lifted gas distribution revenue to USD1.94 bn (+8% YoY) and 2) 40% increase in upstream (oil & gas revenue) to USD442 mn. As COGS (+10% YoY) and Opex (+5% YoY) increased at slower pace than revenue, operating profit jumped by 41% YoY to USD380 mn, almost reached our FY18F of USD383 mn. 9M18 GPM expanded by 210bps to 28% largely helped by 3,240bps expansion in upstream unit’s GPM to 24.6% from negative 7.8% a year ago, while gas distribution GPM contracted by 220bps to 30.8% as distribution margin declined to USD2.3/mmbtu vs USD2.5/mmbtu in 9M17.
3Q18 earnings increase helped largely by lower opex
The company reported 10% QoQ increase in 3Q18 net profit as flat revenue (-0.3%) and declined gross profit (-13.7%) were more than offset by 35% decrease in Opex. Flat revenue came on the back of 23% decline in upstream revenue post expiry of Sanga- Sanga block despite 6% higher in distribution revenue to USD670 mn on 5% hike in distribution volume to 875 mmscfd owing to higher volume on Asian Games event and 1% hikes in ASP to USD8.4/mmbtu. Gross profit dropped by 14% QoQ weighed down by worsened profitability at upstream units where GPM contracted by 1,860bps to 19.7%. However, operating profit still managed to grow by 12% QoQ to USD130 mn as opex dropped by 35% on normalization after Lebaran bonus and employee benefit adjustment in 2Q18. Below operating line, the profitability was also helped by lower tax payment.
No impact on planned DMO gas price
The Energy and Mineral Resources Ministry has proposed the issuance of a regulation to impose a price ceiling for natural gas, particularly for electricity plants, to help state- owned electricity company PLN provide affordable rates to its customers and help PLN improve its financial performance. The gas prices for power plants would be set at DMO price of USD6/mmbtu while currently 41% of PGAS distribution volume is sold to power plant. In contrast to our initial view that DMO gas price will negatively impact earnings, our discussion with PGAS official reveals no impact to earnings. DMO price cap refers to upstream price (excluding distribution margin). The current policy of 7/11 for midstream gas business mentioned that trading spread on upstream gas cost at 7% plus pipeline IRR at 11% USD2.3/mmbtu.
Earnings and TP revised up on solid results
Following stronger-than-expected 9M18 results, we revised up our 2018-19F earnings forecasts by 29-13% to USD289-294 mn. This mainly resulted from 5-3% increase in distribution volume forecasts to 843-894 mmscfd which lifted our revenue forecast by 4.5- 1.1%. We also fine tuned our costs and opex ratio to revenue assumption to align with 9M18 numbers. All things considered, we raise our target price on PGAS to Rp2,720 (prev: Rp2,600 ). As our new TP still offers 31% upside potential, we maintain our Buy rating on PGAS. The completion of Pertagas acquisition may act as further catalyst for stock price.
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