CLSA - Perusahaan Gas - Target Price Rp 1,700 - UNDERPERFORM
Another 90 days
Pertagas acquisition to be done in 3 months; no detail on funding rate
PGAS held its analyst meeting pursuant to its acquisition of Pertagas this morning. The overall mood was negative with questions about the valuation and deal structure being raised frequently. The key positive is PGAS will control 96% of Indonesia’s gas distribution and transmission infrastructure. There were no details of financing other than a tentative 30%/70% cash/debt borrowing plan. As the deal is less attractive than our expectations, its valuation should revert to its five-year mean (13x PER) in our view. We thus lower our valuation basis to be more in-line with its historical mean and lower our target price from Rp2,100 to Rp1,700 and maintain our Underperform rating.
• The transaction is expected to be completed within 90 days from the SPA signing date (29 June). Pertagas’ contribution will be reflected by 4Q18 or 1Q19.
• The key positive from the acquisition is PGAS will control 96% of Indonesia’s gas distribution and transmission pipeline infrastructure. Management expects the combined entity to derive an additional US$65m from synergy over the next five years.
• There were no indications on earnings accretion as the financing scheme has not been finalised. Instead, the management team mentioned Pertagas’ Ebitda and NP would be around US$188m and US$100m.
• Questions largely revolved around Pertagas’ valuation, a 21x 2018 PER, and much higher than PGAS at 13.5x (consensus market open price). In addition, there were queries about the legality of this transaction since it does not involve minority shareholders. There is an option for PGAS to acquire the remaining 49% of Pertagas using a similar transaction scheme. Pertagas would have to be revalued since the audited financials for this transaction are good for only six months.
• Management did not deny the possibility of Saka Energi being given to Pertamina eventually, although no discussions were carried out at this juncture.
• Generally, the key questions such as the financing rate, the exact details of costs and revenue synergies, Pertagas Capex as well as Pertagas’ forward looking financials were not clarified. These questions are on management’s to do lists and we expect more clarification in the next three months.
• As per BI regulations, the deal will be done in Rupiah and the finance rate might be higher than PGAS’ average interest rate (6%). The deal is less attractive than we expected; we believe PGAS’ valuation will revert to its mean as merger sentiment subsides. We lower our target price from Rp2,100 to Rp1,700, pegged to the average of a 13x PER, 6x EV/Ebitda and 1x PB, in-line with its historical average since 2014 (PGAS experienced a structural change after it ventured into LNG and upstream).
(Source : CLSA Research / 4 July 2018)
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