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Danareksa Equity Snapshot - PGAS, 23 April 2019
April 23, 2019 16:30

Perusahaan Gas Negara (PGAS IJ)

Sector restructuring to unlock PGN volume growth


PGN, as the national gas subholding under Pertamina, is the direct beneficiary of government policies to make gas a primary energy source. It expects volumes to grow steadily by at least 3% per annum. Being the sole provider of a pipeline network with Pertagas opens the door for stronger wholesale and retail gas transmission, making the company a worthy partner for Pertamina. We initiate coverage on PGAS with a BUY call and a TP of Rp2,700. There is moderate upside as the current valuation stands at an undemanding 14.4x PE.



Integration of Pertagas sets the foundation for PGN to become a large regional gas player. The industry is characterised by high barriers to entry and given the limited number of players, PGN has virtually no competition in the downstream gas business. The government will continue to push gas consumption and energy diversification to move the country away from oil dependency. Despite having an extensive 10,000km pipeline network post the Pertagas acquisition, PGN will continue with pipeline rollouts, with 440kms due to come onstream. The expanding pipeline network will enable PGN to meet the current and future demand from PLN and industry, whilst also facilitating the deployment of retail gas on a greater scale. PGN is also pushing for gas in the form of CNG, LNG, regasified LNG and City gas to address geographical hurdles in the absence of pipeline network.



Steady volume and revenues growth expected going forward. Natural gas constitutes 24% of the current fuel for power plants according to BPPT, and this figure is predicted to remain above 20% for at least the next decade. We estimate gas volumes and revenues to grow at a minimum pace of 3-5% as natural gas demand is projected to grow 4.9% p.a. and 6.3% p.a. given the final energy consumption by end-users incl. households and transportation. PGN will generate more volumes by consolidating downstream – midstream services under one profit center aligning the business, pricing and marketing objectives and eliminating unnecessary competition between PGN and Pertagas.



PGN is a worthy partner for Pertamina in the downstream gas business. In recent years, challenges in gas exploration, production and infrastructure (EPC) affected PGN gas volumes. One uncertainty relates to the new distribution pricing formula which may soon be implemented by the government, although considering how much prices have come down over the years the downside pricing risk has been greatly reduced. PGN argues on the same wavelength suggesting that it is aligned with the new pricing scheme.



Initiate coverage with a BUY call. We identify several catalysts including the ongoing business integration with Pertagas and a pick-up in volumes at the subholding level. The SAKA divestment also offers upside but is not yet incorporated. We initiate coverage on PGAS with a BUY call and a TP of Rp2,700, implying 17x PE as we see potential upside given that the current valuation is not challenging at only 14.4x PE.


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