Monday, January 13, 2014

Analysis of Indonesia-based Perusahaan Gas Negara

Please read the disclaimer here:http://greedydragoninvestment.blogspot.com/p/about-greedy-dragon.html. Enjoy the article, bitches!


This article is no longer relevant as it came to my attention today that Perusahaan Gas Negara is being taken over. Please accept my sincerest apology for wasting your time. Full apology here.

If you paid attention to financial news, you would have heard that Wall Street is advising its clients to reduce their exposure to emerging markets. I usually ignore what Wall Street has to say as they often have a very short-term outlook and can sometimes give advice that’s just fucking stupid. To be fair, I can’t really fault Wall Street this time as quite a number of emerging markets could have asset bubbles. However, I think that emerging markets are a good bet long-term if you can enter at reasonable prices. Since I don’t have quants and fortune tellers helping me to predict emerging market stock prices, all I can do is simply invest in good companies that I think are reasonably valued. And I think the recent weakness in the Indonesian stock market and Indonesian Rupiah has resulted in Perusahaan Gas Negara becoming quite reasonably priced indeed.

Perusahaan Gas Negara trades on the Indonesia stock exchange. The stock closed at 4,435 Indonesian Rupiah (approximately USD 0.37) per share yesterday. Based on my annualized estimate of the company’s true earnings for the 9 months ended September 30, 2013, the stock would have a Price/Earnings ratio of 14.23 which I think is reasonable. The main adjustments I made in arriving at my estimate of true earnings were subtracting foreign exchange gains and gains from derivatives. According to Bloomberg.com, the stock has a gross dividend yield of 4.59%. According to Deloitte’s list of withholding tax rates for 2013, Indonesia has a withholding tax rate of 20% on dividends. Non-Indonesian investors should take the withholding tax rate into account before investing in the stock. Please consult a tax expert before making a decision to invest in foreign stocks.

Perusahaan Gas Negara earns excellent returns on capital. For the 9 months ended September 30, 2013, the company achieved annualized return on equity (ROE) and return on assets (ROA) of approximately 25.75% and 16.29% respectively. The ROE and ROA figures are based on my estimate of true earnings. The company is also financially strong with cash and cash equivalents totalling approximately $1.567 billion and total liabilities of only $1.553 billion (the figures in the company’s 2013 third quarter report are expressed in U.S. Dollars).

Gas distribution (not to be confused with gas transmission) made up approximately 92.32% of the company’s revenue for the 9 months ended September 30, 2013.To tell if the company’s distribution business is growing, we need to look at distribution volume growth. According to Perusahaan Gas Negara’s 2012 annual report, distribution volume grew at a compounded annual rate of 8.71% in the 5-year period of 2008-2012. However, the company’s distribution volume growth has slowed down recently. In 2012, the company’s distribution volume increased by a modest 1.49% from 795.28 MMScfd in 2011 to 807.16 MMScfd in 2012. Maybe the company’s ongoing projects will give earnings a boost once completed. However, I’m perfectly alright if profits just kept up with inflation over the long-term as I see Perusahaan Gas Negara as more of a stable cash generator instead of a hot growth stock.

I’m definitely interested in investing in Perusahaan Gas Negara. Sure, the stock price could come under further pressure if money keeps flowing out of emerging markets. But the way I see it, any decline in price is an opportunity to add to my position (as long as the business fundamentals remain intact). Unfortunately, the “Greedy Dragon Portfolio” already has quite a significant exposure to Indonesian equities. Maybe I will pick up some shares for my personal portfolio instead or sell some of the Indonesian shares in the Greedy Dragon Portfolio and buy Perusahaan Gas Negara. However, I can’t promise that I will buy shares of Perusahaan Gas Negara in the near future. Thank you for reading. Take care and stay rational!

7 comments:

  1. PGN will be merging with Pertamina Gas (State own) and the market is not looking at it favorably...

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    1. Yes, Gark you're right. One of my readers e-mailed me about this earlier. I just published an pology to my readers about this.

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    2. There is no need to apologize...we are here to help each other right?

      Anyway Petagas and PGN now operating as separate entity leads to a lot of pipeline confusion and clashes, resulting in duplicate, unusable, undersized and un-connectable pipelines. The government wanted these 2 entities to merge to sort out this mess. Since the government hold majority in both, it depends on the minority of PGN, and so far they have protested as the government is looking to merge them 'cheaply'. How it will play out is anyone's guess. PGN directors have so far did not agree nor disagree with the merger.

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    3. Well, maybe the merged entity would turn out to be something interesting. I hope it would be able to achieve high returns on capiatl and that the public and foreign retail investors (like me) can buy shares in the new entity

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  2. Also gas prices have been significantly raised in late 2011 from 4.8 USD to 6.4 USD per mmbtu. Due to this the gas usage actually reduced as many companies opt to switch from gas to coal which is about USD 3-3.5 per mmbtu.

    From 2012 onwards, growth of gas distribution is actually reducing or stagnant due to price increase. Information from PGN they have 30% excess capacity now.

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    1. Obviously I can't give an opinion about the stock now as I don't know the terms of the deal. But I still think Perusahaan Gas Negara is a solid business. It's still earn high returns on capital even in the face of the challenges it faces. Btw, I think gas will be the energy of the future as it it becoming more and more difficult to replace coal reserves. The company's challenges seem short-term to me. But obviously none of my analysis mater now with regards to this company as they're being taken over. Thanks for your input and thank you for reading :)

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