Company Report Perusahaan Gas Negara - BUY

Lower Margin Booked; Higher Volume Onward Anticipated

Tuesday, 06 September 2011

PERUSAHAAN GAS NEGARA

Lower Margin booked; higher volume onwards anticipated

BUY
Maintain Share Price 12M Target Price
Stock Data Reuters code Bloomberg code Issued shares (m shares) Market cap (Rpbn) 52 week low / high (Rp) Avg. daily T/O (Rpbn)

Investment Thesis
We maintain BUY recommendation on PGAS with DCF TP of Rp4,450. In 1H11, PGAS booked flat net income of Rp3.2tr as higher gas distribution price and nonoperating income were offset by lower distribution volume as well as higher gas purchase price and operating expenses. Nevertheless, we still maintain our FY11 EPS growth target of 9.5% YoY as we expect distribution volume to improve in 2H11, anticipating volume recovery from Conoco Phillips.
PGAS JK PGAS IJ 24,242 67,270 2,775/4,650 145.1

: Rp2,775 : Rp4,450(+60.4%)

Key Catalysts
Revenue was flat, arriving at Rp9.4tr. Distribution volume has yet to improve on a

Major Shareholders Gov. of Indonesia Public

Consensus Revenue (Rpbn) KS vs Cons (%) EBITDA (Rpbn) KS vs Cons (%) Net profit (Rpbn) KS vs Cons (%) 11E 20,048 94.1 9,167 111.7 6,968 98.0

57.0% 43.0%
12F 22,063 86.5 9,780 103.8 7,456 85.3

QoQ basis and is stuck lower compared to the prior year. Allocation priority and maintenance by its supplier led PGAS to distribute only 782MMSCFD gas in 1H11 versus 827MMSCFD in 1H10. Meanwhile, transmission volume was flat compared to the same period last year, staying at 846MMSCFD. However, the lower volume was compensated for by the 10%YoY higher average distribution price, enabling top line to stay flat compared to 1H10.
Margin slipped as a result of increasing costs. 1H11 gross margin was down to

62.2% from 63.5% in 1H10, due to an increase in the gas purchase price for both new contracts and the extension of existing contracts. Noteworthy is that operating expenses also jumped by 21.5% YoY, triggered by higher depreciation and salaries and employees benefit raises. Thus, 1H11 operating margin tumbled to 43.1% from the year earlier figure of 47.9%n, resulting a 11.2% YoY decline in 1H11 operating profit to Rp4.1tr from Rp4.6tr in 1H10.
Non operating items saved bottom line performance. Despite a decline in

Company Description PGAS is a state-owned company that operates in the distribution and transmission of natural gas to industrial, commercial and household users. Presently, with the completion of SSWJ pipelines in 2008, the company has a 3,480km distribution network with capacity of 1,013MMScfd and a 2,158km transmission network with capacity of 1,859MMScfd. Share Price
50% 30% 10% May-10 Nov-10 Jan-11 Jul-10 May-11 -10% -30% Sep-10 Mar-11 Jul-11
PGAS JAKINFR JCI

operating performance, higher non-operating income items, such as: gain on derivative, net finance income and gain on forex, managed to avoid 1H11 net income from falling, up by 1.6% YoY to Rp3.2tr.
Distribution volume should improve for the remainder of the year. Management

has indicated they expect distribution volume recovery in 2H11, with the pledge by Conoco Phillips to supply higher volume than 1H11. Together with that, it was reported that PGAS will also swap the new-flow Jambi Merang gas for an additional supply from Conoco Phillips.

Earnings Outlook
Maintaining our estimates on the expected 2H11 volume turnaround. In

comparison, top to bottom have arrived at 48%-50% of our FY11 estimate. We anticipate a higher distribution volume to be booked in 2H11, along with a recovery in supply from Conoco Phillips. Thus, we still maintain our FY11E assumption of 810MMSCFD of distribution volume, with Rp18.9tr & Rp6.8tr revenue and net income.

Financial Highlights
Year to 31 Dec Revenue (Rpbn) EBITDA (Rpbn) Net Profit (Rpbn) EPS (Rp) EPS Growth (%) ROAE (%) DPS (Rp) Div. Yield (%) P/E (x) P/BV (x) EV/EBITDA (x) 2009 18,024 9,301 6,229 257 882.7 66.2 41.3 1.4 11.6 6.2 8.2 2010 19,766 10,751 6,239 257 0.2 48.7 128.5 3.2 15.5 7.0 9.0 2011E 18,859 10,241 6,830 282 9.5 48.9 128.7 4.6 9.8 4.8 6.5 2012F 19,082 10,150 6,359 262 (6.9) 40.9 140.9 5.1 10.6 3.9 6.4 2013F 21,500 10,063 6,281 259 (1.2) 33.8 131.2 4.7 10.7 3.3 6.2
1

Yohan Kurniawan
yohan@e-kgs.com (62 21) 515 2889

Kresna Securities may seek to do business with companies covered in its research reports. Investors should therefore be aware that the firm may have a conflict of interest that could affect objectivity of this report. Hence, this report should form as one of many others factors in making investment decisions. PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS REPORT .

Perusahaan Gas Negara - BUY

Lower Margin Booked; Higher Volume Onward Anticipated
Highlights Result Highlights
Revenue (Rpbn) Gross Profit (Rpbn) Operating Profit (Rpbn) Net Profit (Rpbn) Exchange Rate (Rp/US$) DISTRIBUTION Distribution Revenue (Rpbn) Distribution COGS (Rpbn) Gas Distribution Volume (MMSCFD) Gas Distribution Price (US$/MMBTU) Gas Purchase Cost (US$/MMBTU) TRANSMISSION Transmission Revenue (Rpbn) Gas Transmission Volume (MMSCFD) Gas Transmission Price (US$/MMBTU) Gross Margin (%) Operating Margin (%) Net Margin (%) 2Q10 5,037 3,323 2,460 1,435 9,115 2Q11 4,665 2,859 1,784 1,156 8,593 %Chg (7.4) (14.0) (27.5) (19.5) (5.7) 1H10 9,523 6,048 4,566 3,206 9,188 1H11 9,406 5,855 4,055 3,257 8,745 %Chg (1.2) (3.2) (11.2) 1.6 (4.8) FY11E 18,859 12,010 8,386 6,830 8,500 %FY 49.9 48.8 48.4 47.7 102.9

4,614 1,791 813 6.5 2.5

4,310 1,731 784 6.7 2.7

(6.6) (3.3) (3.6) 2.8 6.3

8,708 3,551 827 6.0 2.4

8,621 3,475 782 6.6 2.7

(1.0) (2.1) (5.4) 10.0 8.7

17,151 6,849 810 6.5 2.6

50.3 50.7 96.5 101.2 102.2

414 880 0.5 66.0 48.8 28.5

337 832 0.5 61.3 38.2 24.8

(18.5) (5.5) (8.6) (4.7) (10.6) (3.7)

800 848 0.5 63.5 47.9 33.7

746 846 0.5 62.2 43.1 34.6

(6.8) (0.2) (1.8) (1.3) (4.8) 1.0

1,606 850 0.6 63.7 44.5 36.2

46.4 99.5 90.7 97.7 96.9 95.6

Source: Company and Kresna Research Trend of PGAS Distribution Volume

900 721 600 551 566 577 756 776 792 841 827 821 824

780

782

527

300

0 3M08 6M08 9M08 12M08 3M09 6M09 9M09 12M09 3M10 6M10 9M10 12M10 3M11 6M11

Source: Company of Volume Trend of PGAS Transmission Volume

1000 743 747 758 779 763 763 767 816 848 853 836 860 846

750

716

500

250

0 3M08 6M08 9M08 12M08 3M09 6M09 9M09 12M09 3M10 6M10 9M10 12M10 3M11 6M11

Source: Company

Kresna Securities may seek to do business with companies covered in its research reports. Investors should therefore be aware that the firm may have a conflict of interest that could affect objectivity of this report. Hence, this report should form as one of many others factors in making investment decisions. PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS REPORT .

Perusahaan Gas Negara - BUY

Lower Margin Booked; Higher Volume Onward Anticipated
Income Statement (Rpbn)
Year to 31 Dec Revenue % growth Gross profit Operating profit Depr / Amort EBITDA % growh Net int inc/ (exp) Forex gain (loss) Inc from subsidiary Other inc/ (exp) Earning before tax Tax expense Minority Interest Extraordinary items Net profit (loss) % growth 2009 18,024 40.9 10,804 7,676 1,625 9,301 46.0 (398) 1,245 (275) 8,247 (1,814) (204) 6,229 882.7 2010 19,766 9.7 12,542 9,036 1,715 10,751 15.6 (123) (369) (481) 8,063 (1,600) (224) 6,239 0.2 2011E 18,859 (4.6) 12,010 8,386 1,855 10,241 (4.7) (64) 402 0 8,724 (1,698) (196) 6,830 9.5 2012F 19,082 1.2 12,084 8,147 2,003 10,150 (0.9) 15 0 8,162 (1,585) (218) 6,359 (6.9) 2013F 21,500 12.7 12,742 7,914 2,149 10,063 (0.9) 97 43 43 8,054 (1,559) (214) 6,281 (1.2)

Balance Sheet (Rpbn)

Year to 31 Dec Cash & its equivalents Trade receivables Inventories Other current assets Fixed assets - net Other LT assets Total Assets ST debt Trade payables Current portion of LT debt Other current liabilities LT debt - net Other LT liabilities Minority interest Total Liabilities Total Equity Net cash (debt) 2009 6,630 1,711 14 908 17,329 2,078 28,670 226 1,088 886 1,530 10,605 1,558 1,046 16,938 11,732 (4,201) 2010 11,072 1,947 14 826 16,782 1,447 32,087 869 2,045 1,122 10,743 2,208 1,232 18,219 13,869 329 2011E 10,423 2,181 15 669 17,727 1,606 32,620 1,240 2,157 1,718 10,110 2,269 1,036 18,530 14,091 313 2012F 11,020 2,162 15 714 17,809 1,716 33,436 1,315 1,184 1,844 8,926 2,313 818 16,400 17,035 2,094 2013F 11,867 2,101 15 874 17,745 2,024 34,626 1,616 1,184 2,131 6,584 2,371 604 14,489 20,137 5,284

Cash Flow (Rpbn)

Year to 31 Dec Net profit (loss) Depr / Amort Chg in Working Cap Non operating adjust. Operating CF Capex - net Others Investing CF Net chg in debt Net chg in equity Dividend Others Financing CF Net CF Free Cashflow 2009 6,229 1,625 (333) (490) 7,031 (1,337) 160 (1,176) (881) (572) (1,000) (285) (2,738) 3,116 5,694 2010 6,239 1,715 (31) 1,621 9,545 (1,158) (212) (1,371) 405 (988) (3,115) 252 (3,446) 4,729 8,387 2011E 6,830 1,855 780 (201) 9,264 (2,789) 234 (2,556) (357) (3,488) (3,120) (393) (7,357) (649) 6,474 2012F 6,359 2,003 100 159 8,621 (2,075) 237 (1,838) (2,335) (3,415) (436) (6,186) 597 6,546 2013F 6,281 2,149 228 41 8,699 (2,032) 261 (1,771) (2,473) (3,180) (428) (6,081) 847 6,667

Financial Ratios
Year to 31 Dec Profitability Gross margin (%) Operating margin (%) EBITDA margin (%) Net margin (%) ROAE (%) ROAA (%) Leverage Current ratio (x) Net Debt/Equity (x) Int. Coverage (x) Activity Receivable TO (days) Payable TO (days) Inventory TO (days) 2009 59.9 42.6 51.6 34.6 66.2 23.0 2.2 0.4 15.8 34 54 1 2010 63.5 45.7 54.4 31.6 48.7 20.5 3.2 (0.0) 22.7 35 43 1 2011E 63.7 44.5 54.3 36.2 48.9 21.1 2.5 (0.0) 30.3 42 65 1 2012F 63.3 42.7 53.2 33.3 40.9 19.3 3.0 (0.1) 37.7 41 68 1 2013F 59.3 36.8 46.8 29.2 33.8 18.5 2.8 (0.3) 50.3 35 66 1

Interim Results (Rpbn)

Sales Gross Profit Operating Profit Net profit Gross Margins (%) Opr Margins (%) Net Margins (%) 2Q10 5,037 3,323 2,458 1,435 66.0 48.8 28.5 3Q10 5,059 3,195 2,451 1,486 63.2 48.4 29.4 4Q10 5,184 3,300 2,027 1,547 63.7 39.1 29.8 1Q11 4,741 2,997 2,270 2,101 63.2 47.9 44.3 2Q11 4,665 2,859 1,786 1,156 61.3 38.3 24.8

Key Assumptions
Year to 31 Dec Distribution volume (MMSCFD) Distribution price (US$/MMBTU) Transmission volume (MMSCFD) Purchase Price (US$/MMBTU) 2009 792 5.6 766.9 2.3 2010 824 6.4 836.0 2.6 2011E 810 6.5 850.0 2.6 2012F 830 6.5 850.0 2.7 2013F 926 6.5 830.0 3.3

Price and Valuation History

2006 Price High Avrg Low P/E High Avrg Low EV/EBITDA High Average Low 2,770 2,207 1,390 13 10 7 24 20 13 2007 3,380 2,190 1,480 11 7 5 89 61 44 2008 3,100 2,387 1,110 118.6 91.3 42.5 13.3 10.5 5.7 2009 4,100 2,981 1,790 16.0 11.6 7.0 11.1 8.2 5.1 2010 4,600 4,002 3,250 17.9 15.5 12.6 10.3 9.0 7.3

Capital History
Date Dec-03 Dec-04 Jan-05 Aug-08 Description IPO @ Rp 1.500 DPP Conversion Option MSOP Conversion Stock Split 1:5

Kresna Securities may seek to do business with companies covered in its research reports. Investors should therefore be aware that the firm may have a conflict of interest that could affect objectivity of this report. Hence, this report should form as one of many others factors in making investment decisions. PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS REPORT .

Perusahaan Gas Negara - BUY

Lower Margin Booked; Higher Volume Onward Anticipated

IMPORTANT DISCLOSURES AND DISCLAIMERS

This report has been produced by PT Kresna Graha Sekurindo Tbk (Kresna Securities), Indonesia. Definition of ratings : BUY = stock return > 10% over the next 12 months (excluding dividend) HOLD = stock return -10% to 10% over the next 12 months (excluding dividend) SELL = stock return <10% over the next 12 months (excluding dividend) Analyst Certification: The views expressed in this research accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst(s) principally responsible for the preparation of this research has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. This report is for distribution only under such circumstances as may be permitted by applicable law. It has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning Kresna Securities, its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. The report should not be regarded by recipients as a subtitute for the exercise of their own judgement. Any opinions expressed in this report are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of Kresna Securities as a result of using different assumptions and criteria. Kresna Securities is under no obligation to update or keep current the information contained herein. Kresna Securities, its directors, officers and employees or clients may have or have had interests or long or short positions in the securities or other financial instruments referred to herein, and may at any time make purchases and/or sales in them as principal or agent. Kresna Securities may act or have acted as market-maker in the securities or other financial instruments discussed in this report, and may have or have had a relationship with or may provide or has provided investment banking, capital markets and/or other financial services to the relevant companies. Employees of Kresna Securities may serve or have served as officers or directors of the relevant companies. Kresna Securirties may rely on information barriers, such as Chinese Walls, to control the flow of information contained in one or more areas within Kresna Securities, into other areas, units, groups or affiliates of the company. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative, products and futures are not suitable for all investors, and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related instrument mentioned in this report. For investment advice, trade execution or other enquiries, clients should contact their respective sales representative. Neither Kresna Securities nor any of its affiliates, directors, employees or agents accept any liability for any loss or damage arising out of the use of all or any part of this report. Additional information will be made available upon request. Securities. 2011 Kresna Securities All rights reserved. This report may not be reproduced or redistributed, in whole or in part, without the written permission of Kresna Securities and the firm accepts no liability whatsoever for the actions of third parties in this respect.

Kresna Securities may seek to do business with companies covered in its research reports. Investors should therefore be aware that the firm may have a conflict of interest that could affect objectivity of this report. Hence, this report should form as one of many others factors in making investment decisions. PLEASE SEE ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES AT THE END OF THIS REPORT .