05 September 2011

INDONESIA EQUITY Investment Research

1H11 Results Review

Arief Budiman +62 (21) 2598 6888 arief.budiman@id.oskgroup.com

Perusahaan Gas Negara

Negative Priced in
PGAS reported a 2Q11 net profit of IDR1.2trn (-45% q-o-q), down mainly on higher costs, dragging its 1H11 net profit to IDR3.3trn, which was below our and consensus expectations. Due to the weaker-than expected results and higher new cost assumptions, we are lowering our FY11-13f net profit by 16%-34%, from which we derive a lower DCF-based target price of IDR3,875. Despite recent regulatory uncertainties, which have dampened sentiment on the share price, we still like PGAS solid business model and attractive valuation. Buy maintained. Weaker 2Q11 on higher costs, expenses. PGAS reported a 2Q11 net profit of IDR1.2trn, which was down 45% q-o-q on the back of higher cost of gas, as well as significant increases in operating expenses and non-operating items. Revenue was relatively flat at IDR4.7trn, as 5.4% higher q-o-q ASP for gas distribution was offset by: i) lower ASP for gas transmission, ii) the strengthening Rupiah, and iii) lower gas distribution volume. PGAS also saw a 190bps contraction in gross margin due to a 9.2% q-o-q jump in cost of gas from a new contract and contract extension. A 48% q-o-q climb in operating expenses squeezed the companys profitability, resulting in operating margin contracting by 960bps to 38.2% in 2Q11. The weak 2Q11 results led to 1H11 net profit coming in flat at IDR3.3trn, which was below our expectations, and only made up 44% our FY11 estimates and 45% of consensus numbers. Our FY11-13f net profit forecasts slashed by 16%-34%. We are lowering our net profit forecast for FY11f, FY12f and FY13f by 16%, 24% and 34% to IDR6.1trn, IDR6.3trn and IDR6.9trn respectively. This is premised mainly on: i) lower gas distribution volume assumption at 794-848mmscfd for FY11-13f, ii) higher gas purchase cost assumption of USD2.9-3.3/mmbtu and iii) higher operating expenses as a percentage of revenue assumptions at 19%-20% of revenue (see Exh.2 for details). Uncertainty in gas costs may continue to hurt share price. PGAS share price has plunged by some 26% since news broke on 2 Aug that Indonesia's upstream oil and gas regulator (BP Migas) is seeking as much as a 200% increase on that price PGAS pays on its gas as per its old contracts to USD5.5/mmbtu. Management has indicated its intention to maintain its legacy contracts given their B2B nature and the Indonesian government may not directly interfere with contracts. However, the company has indicated its willingness to review its contracts if the company gets higher volume supply. Maintain Buy, but with new target price of IDR3,875. While we expect the current situation to remain status quo, the shares price underperformance has been excessive. We believe the renegotiation price risk has been priced in and will not harm PGAS strong business model, particularly given its dominant 94% share of Indonesias gas distribution market (virtual monopoly). PGAS should have strong pricing power, which is also being supported by the steep discount in gas prices to other oil-based fuels, should costs increase. PGAS is now trading at an attractive 11.3x on its 2012 earnings. Due to our downward earnings revisions, we now have lower target price of IDR3,875 but maintain our Buy call.
FYE Dec (IDRbn)
Revenue Net Profit % chg y-o-y EPS (Rp) DPS (Rp) Dividend yield (%) ROE (%) ROA (%) PER (x) P/BV (x) EV/ EBITDA (x)

BUY
Target Previous Price IDR3,875 IDR4,850 IDR2,950

CONSTRUCTION AND PROPERTY The companys business mainly involves in gas distribution and transmission in Indonesia with virtually holding monopolistic position in gas distribution. Stock Statistics Bloomberg Ticker Share Capital (m) Market Cap (IDRbn) 52 week HL Price (IDR) 3mth Avg Vol (000) YTD Returns (%) Beta (x) Major Shareholders (%)
Government of Indonesia Public PGAS IJ

24,241 71,512 4,650 2,925 43,355 -33.3 1.1

56.9 43.1

Share Performance (%) Month 1m 3m 6m 12m Absolute -25.8 -24.5 -13.8 -23.4 Relative -0.1 -27.8 -25.5 -37.3

6-month Share Price Performance

4500 4300 4100 3900 3700 3500 3300 3100 2900 2700 2500 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11

FY09
18,024 6,229 860.5 265 53 1.8 66.2 23.0 11.1 5.9 8.0

FY10
19,766 6,240 -2.9 257 128 4.4 48.7 20.5 11.5 5.2 6.9

FY11 f
18,971 6,149 -1.5 254 129 4.4 38.9 18.8 11.6 4.0 7.1

FY12f
20,339 6,324 2.8 261 127 4.3 32.6 18.1 11.3 3.4 6.0

FY13f
22,030 6,890 9.0 284 130 4.4 30.1 18.2 10.4 2.9 5.2

05 September 2011 Exhibit 1. PGAS 1H11 results 1H11 results (IDRbn) Revenues Gross Profit Operating Profit EBITDA Interest income Interest expense Loss on changes in derivative Forex gain Other income Pretax profit Tax Minority Interest Net Profit Core Profit 1Q11 4,741 2,997 2,270 2,668 87 -87 414 207 1 2,892 -729 -62 2,101 1,636 2Q11 4,665 2,859 1,784 2,233 85 -35 -214 -139 52 1,533 -344 -33 1,156 1,377 Chg q-q -1.6% -4.6% -21.4% -16.3% -2.3% -59.2% -151.6% -167.1% 5882.3% -47.0% -52.8% -46.5% -45.0% -15.8% 6M10 9,523 6,048 4,566 5,297 117 -186 -67 -8 42 4,465 -1,144 -115 3,206 3,230 6M11 9,406 5,855 4,055 4,901 171 -122 200 68 53 4,426 -1,074 -95 3,257 3,013 Chg y-y -1.2% -3.2% -11.2% -7.5% 46.1% -34.3% -400.4% -985.2% 26.6% -0.9% -6.1% -17.4% 1.6% -6.7% 6M/FY11f 47.2% 46.4% 42.4% 44.8% 73.1% 29.4%

45.8% 47.8% 42.8% 44.3% 42.2%

Operating data (IDRbn) Sales Distribution Transmission Fiber optic business Volume (in mmscfd) Distribution Transmission Average exchange rate ASP Distribution (in USD/mmbtu) Transmission (in USD/mmbtu) Cost of gas (in USD/mmbtu)
Source: Company and OSK Research

1Q11 4,740 4,311 408 21

2Q11 4,666 4,310 338 19

Chg q-q -1.6% 0.0% -17.3% -10.7%

6M10 9,523 8,708 800 15

6M11 9,406 8,621 746 40

Chg y-y -1.2% -1.0% -6.8% 166.6%

780 860 8,709

767 832 8,590

-1.7% -3.3% -1.4%

827 848 9,189

782 846 8,745

-5.4% -0.2% -4.8%

6.9 0.61 2.8

7.3 0.52 3.0

5.4% -13.3% 9.2%

6.4 0.57 2.5

7.0 0.56 2.9

10.0% -1.8% 13.5%

Exhibit 2. Summary of earnings forecast changes New forecast 2011f 2012f 2013f Gas distribution volume (mmscfd) Gas distribution cost (USD/mmbtu) Gas distribution ASP (USD/mmbtu) Revenue (IDRbn) Gross profit (IDRbn) EBITDA (IDRbn) Operating profit (IDRbn) Net profit (IDRbn) Gross margin (%) EBITDA margin (%) Operating margin (%) Net margin (%)
Source: OSK Research

Old forecast 2011f 2012f 2013f 824 2.8 6.90 19,939 12,612 10,930 9,559 7,356 63.3 54.8 47.9 36.9 889 2.9 7.24 22,401 14,183 12,298 11,030 8,304 63.3 54.9 49.2 37.1 983 3.1 7.61 26,069 16,860 14,673 13,491 10,390 64.7 56.3 51.8 39.9

Change (%) 2011f 2012f 2013f -3.6 3.5 1.8 -4.9 -7.9 -12.7 -18.3 -16.4 -7.5 6.8 1.7 -9.2 -13.3 -16.1 -23.5 -23.8 -13.7 6.4 1.8 -15.5 -21.6 -26.1 -33.2 -33.7

794 2.9 7.02 18,971 11,621 9,540 7,806 6,149 61.3 50.3 41.1 32.4

822 3.1 7.37 20,339 12,299 10,315 8,439 6,324 60.5 50.7 41.5 31.1

848 3.3 7.74 22,030 13,216 10,850 9,011 6,890 60.0 49.2 40.9 31.3

05 September 2011

FINANCIAL FORECAST

FYE Dec (IDRbn)

Turnover EBITDA PBT Net Profit EPS (IDR) DPS (IDR)

FY09
18,024 9,259 7,806 6,229 265.1 52.9

FY10
19,766 10,625 8,439 6,240 257.4 128.5

FY11f
18,971 9,540 9,011 6,149 253.7 128.7

FY12f
20,339 10,315 7,806 6,324 260.9 126.8

FY13f
22,030 10,850 8,439 6,890 284.3 130.4

Margin EBITDA PBT Net Profit 51.4 42.6 34.6 53.8 45.7 31.6 50.3 41.1 32.4 50.7 41.5 31.1 49.2 40.9 31.3

ROE ROA

23.0 66.2

20.5 48.7

18.8 38.9

18.1 32.6

18.2 30.1

Balance Sheet Fixed Assets Current Assets Total Assets Current Liabilities LT Liabilities Shareholders Funds Net Gearing (%) 17,329 10,592 28,670 3,600 13,338 11,732 43.7 16,782 13,859 32,087 4,220 13,999 13,869 10.5 14,938 18,296 33,432 3,942 11,724 17,766 Net cash 13,232 23,059 36,504 4,780 10,709 21,016 Net cash 11,567 27,272 39,065 5,050 9,271 24,744 Net cash

Cash Flow PBT Other Operating Cash Chg in Working Capital Operating Cashflow CAPEX FCF 7,806 -134 -224 7,319 -581 6,738 8,439 239 -1093 8,182 -946 7,236 9,011 -741 1624 8,689 -515 8,174 7,806 401 107 8,947 -443 8,504 8,439 -344 93 8,759 -450 8,309

05 September 2011

OSK Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing. However, information and opinions expressed will be subject to change at short notice, and no part of this report is to be construed as an offer or solicitation of an offer to transact any securities or financial instruments whether referred to herein or otherwise. We do not accept any liability directly or indirectly that may arise from investment decision-making based on this report. The company, its directors, officers, employees and/or connected persons m ay periodically hold an interest and/or underwriting commitments in the securities mentioned. Distribution in Singapore This research report produced by OSK Research Sdn Bhd is distributed in Singapore only to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, CAP. 289 of Singapore. If you are not an Institutional Investor, Expert Investor or Accredited Investor, this research report is not intended for you and you should disregard this research report in its entirety. In respect of any matters arising from, or in connection with, this research report, you are to contact our Singapore Office, DMG & Partners Pte Ltd (DMG).

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