In the context of transforming state-owned energy giant Pertamina into an oil & gas holding company, while restructuring various businesses into four sub-holding companies, Perusahaan Gas Negara (PGN) plans to acquire Pertamina Gas (Pertagas), a subsidiary of Pertamina. Main motive for this restructuring is to make the management of oil & gas in Indonesia more efficient.

In late June 2018, PGN and Pertamina agreed on a conditional purchase agreement to transfer a 51 percent stake in Pertagas to PGN for a price of IDR 16.6 trillion (approx. USD $1.1 billion). Under the deal PGN was given 90 days to complete the transaction.

Reza Pahlevy, Finance Director of PGN, informed that about one-third of the funds - required to acquire the 51 percent stake in Pertagas - would originate from PGN's internal cash reserves, while the remaining two-thirds would need to be financed externally. It implies that PGN needs to take on debt worth more than IDR 11.0 trillion (approx. USD $769 million). It was a message that was not liked by investors, reflected by the 16.41 percent tumble that was experienced by PGN shares shortly after the statement on 3 July 2018. This also meant that the company's price-to-earnings ratio (PER) has become quite attractive at 8.6 times. However, PGN shares are still not showing a recovery.

Ajay Mirchandani, analyst at JP Morgan, noted that there are three matters that made investors disappointed with the corporate actions that have been undertaken by PGN.

Firstly, the value of the Pertagas acquisition, by far, exceeds JP Morgan's estimate of 9 - 9.5 times EV/EBITDA. The actual acquisition is estimated at 14 times EV/EBITDA. Secondly, PGN only obtains a 51 percent stake in Pertagas, and not a full 100 percent stake as had been expected. This means that PGN can only enjoy 51 percent of net profit that is generated by Pertagas. Thirdly, PGN has to come up with big funds (and take on new debt) to finance the deal.

Projection Future Corporate Earnings Perusahaan Gas Negara:

   2016  2017 2018F 2019F 2020F
Net Revenues 2,935.0 2,970.0 3,061.0 3,634.0 3,688.0
Net Income   304.0   143.0   174.0   183.0   184.0
P/E Ratio (x)     9.0    19.2    15.8    15.0    14.9
P/BV (x)     0.9     0.9     0.8     0.8     0.8

in million US dollar unless otherwise stated
Source: JP Morgan (09/07/2018)

Considering Pertagas is estimated to raise around USD $90 - $100 million in net profit per year, PGN will only be able to enjoy slightly over half of the total, while at the same time it has to pay serious interest over the debt it takes on to finance the acquisition.

Still, JP Morgan recommends PGN stocks to be overweight for two reasons: (1) the company's shares declined drastically after the announcement of the acquisition, and (2) there is an option for PGN to purchase the remaining 49 percent stake in Pertagas from Pertamina by swapping it for PGN's subsidiary Saka Energi (which is valued at USD $710 million).

Shares of PGN, listed on the Indonesia Stock Exchange, fell 3.06 percent to 1,585 a piece on Tuesday (10/07). So far in 2018 the company's shares have fallen 9.43 percent.

Stock Quote Perusahaan Gas Negara - PGAS: