Derating, but recovery on the horizon. Concerns over PGAS' future performance have arisen due to various recent events, including the Gunvor 'force majeure' incident and management changes, resulting in a significant stock price derating. Despite this, we believe recovery is coming, driven by several factors: (1) PGAS’ position as a key partner of Pertamina puts the company in the front seat to secure green energy development contracts from the new capital city project (IKN). For starters, PGAS plans to build a gas distribution network to distribute gas to various locations at IKN, while also working on increasing the company’s total gas network size to 1,000 km. (2) PGAS aims for a 3% YoY increase in gas trading volumes to 960 bbtud, supported by additional supplies from the Jambaran Tiung Biru project, which will be distributed to PGAS’ customers in Java and Sumatra. (3) The expiration of PGAS' HGBT gas price scheme at end-2024 provides flexibility to sell gas at spot prices or a premium to the Henry Hub. (4) PGAS and MEDC have agreed to extend their gas sale and purchase agreement (PJBG) through 2028, with no changes in the buy-sell scheme, allowing for PGAS to be able to maintain its gas costs and margins. (5) PGAS strategically offers Fasken Block for sale to help the company focus on its existing operating assets and gain cash for more O&G block acquisitions. However, it is worth noting that should Fasken be sold, Saka will lose about 7% of its revenue.

 

Post-Gunvor recovery, moderate earnings outlook. Despite the anticipated FY24F recovery, we trimmed our revenue forecast by -2.3% to USD 3.7 billion due to moderate FY24F gas distribution volume of 960 bbtud (+3% YoY). However, we marginally raised FY24F EBITDA and net profit projections by +6.1% and +4.6% to USD 1.1 billion (+3.1% YoY) and USD 276 million (reflecting 7.2% YoY EPS growth), given favorable EBITDA margins (28.7%) and post-Gunvor recovery. It should be noted that management's single-digit FY24F growth guidance aligns with our projection.

 

Maintain BUY, Lower TP to IDR 1,300. As we roll over our valuation to FY24F-FY25F, we maintain our BUY rating on PGAS, albeit with a lower TP of IDR 1,300, implying FY24F EV/EBITDA of 2.6x (-0.5 3-year st. deviation). This discounted valuation and recovery narrative might appeal to investors. On valuation, we transitioned from SOTP to Forward P/E band, as Saka Energy is not PGAS’ primary growth driver (the potential sale of Fasken block will result in lower Saka’s contribution in Pangkah, diminishing PGAS’ high multiple).

 

Downside risks: Lower-than-expected operating metrics and negative sentiment from lower oil & gas prices.