The Ministry of Energy and Mineral Resources has decided to revoke the special low gas price of USD 6/mmbtu that was previously granted to PT KCC Glass Indonesia
This decision has surprised many, as the 10-year low gas price incentive was part of the initial investment agreement with KCC Glass.
We believe this revocation of the special gas price presents a potential opportunity for midstream players such as RAJA and PGAS.
There’s some hope for the discontinuation of HBGT, which has seen a slight glimmer of optimism following the KCC Glass news.
In recent years, HBGT has significantly constrained midstream players like PGAS, leaving them with profit margins below USD 2/mmbtu.
The hope among midstream players that HBGT will not continue could be an opportunity for PGAS to boost its profitability, as distribution is the core of PGAS’s business.
If KCC Glass and other industrial companies are forced to pay market rates for gas, PGAS could capitalize on the situation to enhance its profits.
Despite some challenges, PGAS remains in a strong financial position.
The challenge many have raised regarding PGAS is the Gunvor issue, which we believe is unlikely to escalate. Why?
PGAS’s management feels confident with the USD 68.5 mn provision they’ve set aside for the dispute with Gunvor.
They believe this amount is enough to cover any potential liabilities.
The contract with Gunvor is valued at around USD 1.1 bn, and the case is currently under review by the International Arbitration Court in London, a process that could take up to two years.
Furthermore, on their gas distribution side, PGAS has seen a slight slowdown.
In August 2024, gas distribution volume only reached 848 BBTUD, falling short of their target of 954 BBTUD.
Supply shortages in the Sumatra and West Java regions are one of the main reasons behind this issue.
Their primary supplier, the Corridor Block, currently delivers around 410 BBTUD, but this is expected to drop to 271 BBTUD by 2025 due to depleting gas reserves.
Despite this, PGAS has already started adding LNG to their gas distribution portfolio.
Although LNG currently contributes just 1%, it offers higher profit margins, which could help boost the company’s profitability.
Financially, PGAS is projected to see strong earnings growth of around 24% yoy in 2024, or approximately USD 345 mn.
This growth is driven by improved gas distribution margins, revenue from LNG trading, and the absence of one-off provisions.
In 2025, profit growth is expected to stabilize due to challenges in gas supply.
The profit spread is also forecasted to rise to USD1.8/MMBTU, higher than USD1.7/MMBTU in 2023, supported by higher gas selling prices and greater use of LNG.
Another interesting point is PGAS’s dividend yield, which is projected to reach 10% in 2025.
With a payout ratio of 70%, the company is set to distribute a significant dividend.
With all these factors in mind, we recommend a BUY on PGAS stock with a target price of IDR 1,950.
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