Perusahaan Gas Negara At the intersection
■ Perusahaan Gas Negara reached a mutual understanding with KESDM, and may receive gas price cut compensation. Meanwhile, it still has outstanding tax disputes.
■ In a blue sky scenario, its equity valuation could be Rp2,200/share. In a bear case scenario, its equity valuation could be Rp950/share.
■ Divestment of SEI’s assets or as a corporation could be a re-rating catalyst. We upgrade from Reduce to Hold with a DCF-based TP of Rp1,300. Compensation proposal leaning towards the right direction In FY20, it provisioned US$53m for excess margin from selling unutilised cheap gas supply to regular customers in Apr-Dec 20.
The government requires PGAS to take the allocated cheap gas supply of 677bbtud, although it is not fully utilised. However, it cannot recognise the excess margin for selling cheap gas supply to regular customers.
As of now, it has reached a mutual understanding with Ministry of Energy and Mineral Resources (KESDM) to receive compensation for gas price cut (US$6/mmbtu for 7 industrial sectors and power). The discussion also involves Ministry of Finance and Ministry of SOE.
Compensation approval has to be audited by government’s auditor agencies (BPK or BPKP). It will continue to provision excess margin from selling unutilised cheap gas supply to regular customers until it receives compensation approval. It may reverse the provision expenses retroactively from Apr 20 to date of compensation approval.
PGAS expects compensation to result in revenue remaining the same prior to gas price cut implementation, implying average gas distribution margin of ~US$2/mmbtu. Sensitivity analysis on tax dispute and compensation
We ran a sensitivity analysis with two key assumption changes: 1) tax dispute expenses, as there is a total of US$513m outstanding tax disputes (Fig 1), 2) gas price cut compensation.
Our valuation is now pegged to base case scenario (our TP of Rp1,300 is based on DCF-valuation, WACC: 9%, LTG: 0%). In our bear/bull/blue sky scenarios, its equity valuation could be Rp950/Rp1,900/Rp2,200 per share, respectively (pages 2-6).
SEI’s asset divestment could become a catalyst; upgrade to Hold It is open to divesting its oil and gas upstream arm, Saka Energi Indonesia (SEI), either at the assets or corporation level. Local and foreign investors (i.e. SOE from China) have interest in purchase, and are in the process of obtaining data room access. If any divestment is realised, this could happen in Nov-Dec 2021F at the earliest. In FY20, SEI’s total assets were US$2bn. Its two largest assets are in Pangkah (US$633m) and South Sesulu (US$301m).
SEI’s divestment is positive for PGAS due to its large contribution to total capex (33-48% contribution p.a. in FY21-23F). We increase our FY21F core EPS by 216% as we take out SIPL’s tax penalty expense, while FY22F core EPS is decreased by 18% due to increasing interest and tax expenses. We upgrade PGAS from Reduce to Hold due to valuation. Upside risks: compensation realisation, and SEI’s asset divestment. Downside risks: more tax dispute expenses
At the intersection OUTSTANDING TAX DISPUTES According to FY20’s financial statements, we estimate that PGAS group’s outstanding tax disputes could amount to US$513m (Fig 1).
This includes the tax underpayment that has not been expensed, and possible tax penalty payment (with 100% amount of tax underpayment). PGAS is confident that it is unlikely to be liable for tax penalty related to the SIPL’s (Saka Indonesia Pangkah Limited) acquisition tax underpayment (US$128m) and PGAS’s VAT underpayment (~US$294m).
In FY20, it has not provisioned for any of the penalties. The reason is because both PGAS and SIPL won the cases in tax office, but received unfavourable decisions in the Supreme Court. According to PGAS, technically, tax office will only be able to charge for tax penalty on top of the tax underpayment if the defendants lose in the tax court. See more details in “An unfortunate tax dispute” for SIPL’s acquisition tax underpayment (dated 4 Jan 2021) and “Another unfortunate tax dispute” for PGAS’s VAT underpayment (dated 24 Jan 2020).
SENSITIVITY ANALYSIS Base case scenario In our base case scenario, we assume that PGAS would not need to expense any more tax disputes, nor receive any compensation for gas price cut. Note that we have forecasted 100% gas distribution volume to have lower gas selling price of US$6/mmbtu, starting in 2H21F. Based on this scenario, our equity valuation for PGAS is Rp1,300/share.
We peg our TP price to this scenario. Bear case scenario In our bear case scenario, we assume that PGAS would need to fully expense the remaining outstanding tax dispute of US$513m in FY21F, while not receiving any compensation for gas price cut. Note that we have forecasted 100% gas distribution volume to have lower gas selling price of US$6/mmbtu, starting in 2H21F. Based on this scenario, our equity valuation for PGAS would be Rp950/share.
Bull case scenario In our bull case scenario, we assume that PGAS would need to fully expense the remaining outstanding tax dispute of US$513m while receiving compensation for gas price cut (weighted average margin revert to US$2/mmbtu). Based on this scenario, our equity valuation for PGAS would be Rp1,900/share.
Blue sky scenario In our blue sky case scenario, we assume that PGAS would not need to expense the remaining outstanding tax dispute of US$513m while receiving compensation for gas price cut (weighted average margin revert to US$2/mmbtu). Based on this scenario, our equity valuation for PGAS would be Rp2,200/share.
VOLUME ACHIEVEMENT IN 1Q21
· Total gas distribution volume in the month of Mar 21 decreased to 912mmscfd (-2% mom). In Mar 21, PGAS’s gas distribution volume declined to 832mmscfd (-1% mom), Gagas’s was 6mmscfd (flat mom), and Pertagas’s declined to 74mmscfd (-19% mom).
· Cumulatively, 3M21’s total gas distribution volume was 917mmscfd (+4% yoy), slightly lower than the 920mmscfd in 2M21 (+4% yoy). PGAS’s 3M21 gas distribution volume (including Gagas) improved to 836mmscfd (+3% yoy) vs. 835mmscfd (+2% yoy) in 2M21. Pertagas’s gas distribution volume declined to 81mmscfd (+18% yoy) in 3M21 vs. 85mmscfd (+38% yoy) in 2M21. We estimate gas distribution volumes of 832mmscfd/85mmscfd (+11% yoy/+10% yoy) for PGAS (including Gagas)/Pertagas in FY21F.
· Gas transmission volume in the month of Mar-21 was 1,235mmscfd (+4% mom). Cumulatively, 3M21’s volume was 1,210mmscfd (-10% yoy). We estimate 1,350mmscfd (+8% yoy) gas transmission volume in FY21F.
· Upstream lifting volume in the month of Mar-21 was 13.1k boepd (-42% mom). Cumulatively, 3M21’s volume was 17.2k boepd (-18% yoy). We forecast 25.5k boepd (+22% yoy) upstream lifting volume in FY21F.
FORECAST CHANGES We increase our FY21F core EPS estimate by 216%, mainly because we take out the US$128m tax penalty expense related to SIPL’s acquisition tax dispute. The company thinks that it is unlikely to be liable for the penalty as it won the case in tax court previously before receiving an unfavourable decision in the Supreme Court. We cut our FY22F core EPS by 18%, largely due to increasing interest and tax expenses.
– CIMB Bank Research