Warren Buffett once said
in one of his annual letter, ‘We like to invest in companies that are already
established and operated for more than 100 years. We do not want to take the
risk by invest in startup companies that do not have a long track-record of
performance.’ In short, Buffett prefers to invest in mature and
well-established companies rather than ‘brand new’ ones. However, when this
principle is applied in Indonesia, investors may find it difficult. Because,
from about 500 companies that listed on the Indonesia Stock Exchange, how much
of them that have been established for more than 100 years? The fact is, our
beloved country (Republic of Indonesia) was proclaimed in 1945 or seventy years
ago, and the Jakarta Composite Index (JCI) itself was launched in 1983.
But fortunately,
Indonesia actually has several companies that have been operating for more than
a century. One of these companies is Perusahaan
Gas Negara (PGAS). Formally, PGAS is established as a limited liability
company in 1965, and listed on the Stock Exchange in 2003. However, as a gas
company, PGAS has been operating long before that, ie since 1859 under the name LJN Eindhoven &
Co. (belonged to private investor from the Netherlands. Not long after the
Republic of Indonesia was proclaimed in 1945, the company was taken over by the
new government, to become a SOE). PGAS is the first company in Indonesia, or
probably one of the first in the world, who introduced the use of gas fuel for the public and general
industry, where the company's main business is to distributing gas (made from
coal) from coal mines to urban areas.
Today the company's
main business is still the same, namely the distribution of gas, although no longer coal gas but natural gas, because it is more
economical. Possibly because of its status as the first company in its field,
and because the gas distribution is a high entry barrier business, PGAS is
practically the sole ‘ruler’ in the gas distribution business in Indonesia,
with a market share of 81% by the end of 2014. The combination of market
monopoly, management integrity as a
public company, plus experience for more than one hundred and fifty years (because,
if monopoly is the only reason, then why other SOE’s like Pertamina, PLN, and
PT Kereta Api, they still suffering losses?), causing PGAS almost always scored
big profits each year, with an average ROE of nearly 30% over the last nine
years (2006 – 2014). As a result, the company's net asset value increased from
only US$ 569 million by the end of 2006, to US$ 2.8 billion by the end of 2014.
This means that if someone buys shares of PGAS in 2006 and still hold it until
today, regardless of fluctuations in the price of shares in market, his real
capital gains are about 21.9% per annum, not
including dividends (after the dividend, the total gain may be as high as
25% per annum). As a well-established state-owned company, PGAS pay dividends
on average 30 – 50% of its annual net profit to shareholders.
In short, if you look
at the excellent track record above, then PGAS is very interesting for
long-term investment. It is also a big
cap stock, so you can buy it for millions of US$ if you like. Moreover, the
company also began to successfully make significant revenue from its investment
in upstream sector of oil and gas, which started in 2011 by establishing PT Saka Energi Indonesia as a vehicle
to acquire oil and gas blocks in the
country, either as a whole or in part, and the acquisitions are still continue
until today. Most recently, on April 15 yesterday PGAS added another gas block
in its portfolio by acquiring a 11.7% participating interest in the Muara Bakau
PSC in East Kalimantan Province, which is scheduled to start the gas production
in 2017.
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| Logo of PT Saka Energi Indonesia |
And the result, from
the company's gross profit of US$ 1.04 billion in 2014, US$ 115 million or 11%
of which comes from the oil and gas production (not distribution) business. It
should be noted here is that profit is obtained when oil and gas prices were
down in recent months. Because oil and gas prices are recently go up, then the
profit should be greater in the future. PGAS’ venture in upstream business is
apparently more successful in generating alternative income for the company.
While the gas transmission business,
though it was pioneered since 1998, but it only able to produce a gross profit
of US$ 5 million for the company in 2014, or not significant. A description of
the gas transmission can be read here.
Probably because of the
company’s success in obtaining new revenue sources from oil and gas blocks,
then management is more eager to acquire more blocks. That's why in 2014, PGAS
issued US$ 1.3 billion of bonds in Singapore, where the funds will be used for
working capital, including the acquisition of oil and gas blocks. The bonds will
mature in 2024, with coupon of only 5.1% per annum (so we could say that PGAS
has just received free money, because even if the proceeds are placed in local bank
deposits or government securities, the profits will be more than enough to pay
the coupon). The low interest rate and the ten years term of the bonds showed a
high confidence of investors in Singapore that PGAS is a very good company and
will continue to grow in the long run. Vecause if the company failed in its oil
and gas blocks venture, the overall corporate income will not be disrupted
because to the company's core business, namely the distribution of gas, has
been very settled. Due to large value of the bond value (US$ 1.3 billion is
about a half of PGAS net assets), then of course PGAS apply some hedge where
the value of the bond will not be affected by the fluctuations in the Rupiah’s
exchange rate against the US Dollar.
And what about the company’s
shares?
For those of you who
are already familiar with my investment style, then you'd know why I suddenly discuss
this PGAS. Yup, that's because the stock suddenly dropped significantly in the
past few weeks. When this article was written, PGAS is in a position of Rp4,340
per share, which is the lowest position
in the last two years, and about 30% below its peak position of 6,250.
Based on the company's financial statements for the full year 2014, and by
using the exchange rate of Rupiah on December 31, 2014 which is Rp12,501 per US
Dollar, the price reflects PBV of 3.0
times and PER 11.6 times. The
question of course, is the price low enough? In this case, there are several
things to note.
The first, as one of
the most established, most consistent, and most profitable companies in the Indonesia
Stock Exchange, it is reasonable if the valuation of PGAS is (almost) always high,
it can be seen from its PER that is always between 14 to 16 times in normal
times, sometimes even higher than that. However, just like any other stocks, it
does not mean that the valuation of PGAS is never low. In the last five years,
there were three moments where PGAS fall down about 30% from its highest
positions, ie in September 2011, December 2013, and today. Here’s the details:
Date
|
Lowest
|
Highest (before
drop)
|
Change (%)
|
Sep-11
|
2,350
|
4,475
|
(47.5)
|
Dec-13
|
4,435
|
6,250
|
(29.0)
|
Apr-15
|
4,370
|
6,150
|
(28.9)
|
Now, if we look back at
the experience in September 2011 and December 2013, it did not matter how deep
the declines, yet in the end PGAS will rise again. But unlike the two previous declines
(and perhaps also the declines before that) where the decreases were aligned
with the corrections of JCI (in September 2011 and December 2013, JCI had drop
17 and 19% from its peak respectively), this time the price correction of PGAS
happened when the JCI was still relatively stable. In addition, if you look at
the case of September 2011, PGAS had drop to a price which reflects PER of only
8.5 times (using the EPS at the time). While at the current price, PGAS still
have PER of 11.6 times. So maybe the price could down further?
That was a first.
Secondly, whenever a large stock (including PGAS) down, then there will be a
lot of bad news related to the company that 'explain' the cause of the decline,
or in other words, the negative
sentiments. Based on my record alone, in this time there are several 'bad
news' associated with the company, namely:
1. The Minister of
Industry, Saleh Husin, told the press that the Ministry of Industry proposes (proposes
to who?) a decrease in gas price by 10 – 20%, which, if it the proposal is accepted,
PGAS profit margin would be depressed (the minister probably didn’t know that
the selling price of gas from PGAS is already the cheapest in the country due
to large scale of the business, even cheaper than the subsidized ones),
2. PGAS Revenue in 2015
is predicted to fall about 6% because the gas consumption by State Electricity
Company or Perusahaan Listrik Negara (PLN) has been reduced (this issue is not
valid, because in 2014, PGAS revenue from PLN was US$ 624 million, up from the
previous year of US$ 575 million. If the revenue from PLN is really reduced,
then the effect would not be significant because PLN only contributed of less
than 20% of PGAS total revenues),
3. PGAS must submit its
oil and gas blocks to Pertamina (what the hell???), and
4. PGAS have difficulty
in obtaining gas supply (although this issue is correct, but it's just an old
story).
Frankly, I am quite know
that those negative issues will eventually evaporate by themselves. In fact, most
of these negative issues are coming out just after the stock was down (when
PGAS was still high, there are no negative issues). And as an investor, that is
the challenge: When you are targeting (or already bought) a blue chip stock
whose prices are down, then you should be able to sort out, which news that for
real and which news that only rumors. You may read
about that here. Beyond that, you have to stay focus on the fundamentals of
the company and its stock valuation.
And the third, related
to the company's fundamentals. Although to this day PGAS still dominate the gas
distribution business in Indonesia, but the company's market share continues to
fall from 93% at the end of 2010, to only 81% by the end of 2014. The decline
occurred because the amount of gas distributed by the company had been stagnant
over the last four years, because, as already mentioned above, PGAS have it difficult to obtain gas
supplies from the producers, and these conditions have been occurred since
2010. In 2014, PGAS had distributed 1,717 MMScfd of gas, or just grew a little
from 1,661 MMScfd in 2010. As a result, although the value of PGAS net assets
is still growing significantly eevery year (due to the high profitability
ratios), but the net income had a stagnant growth. In 2014 PGAS recorded a net
profit of US$ 748 million, or only grew slightly compared to US$ 696 million in
2010. The difficulties in obtaining gas supply also causing the management to
be 'lazy' in building new gas pipelines and other infrastructures.
To deal with the problem
of gas supply, since 2011 the company seeks to have its own supply of gas
through the acquisition of oil and gas blocks. And here is the good news: As
already mentioned above, these efforts have been successful so far, where today
PGAS have a new source of revenue from the sale of oil and gas, this time in its
position as a producer, not distributor. At the end of 2014, of the eight oil
and gas blocks owned by the company either in whole or in part (not including
the Muara Bakau Block which acquired in 2015), three of which were already in
production. In fact, if not for this new source of revenues, PGAS net income in
2014 will not be decreased by 10.1% compared to 2013, but would be more than
that.
However, the fact remains:
Net income of PGAS in 2014 was down from
the previous year. If in the upcoming first quarter of 2015, the company
again record a decline in profits, the negative sentiments that have been
mentioned above will back to the show, and PGAS shares will drop further.
In conclusion, despite PGAS,
on its current price, is very interesting in terms of valuation, while the
long-term outlook of the company is fairly good due to a successfull venture in
the upstream business, but I prefer to wait and see, especially because the JCI
looks like running out of fuel for rose further (if JCI down then PGAS would
still down further), and we also better wait for the company’s next financial
statements, just to be sure. I do not know PGAS decline will stop at what price,
but as already mentioned above: No matter how deep the decline, but in the end
the stock will rise again.
But Sir, I've already
bought the shares, what should I do? Well, if you bought PGAS at the price of
4,750 or lower, I think the price was quite low so that, although it may take a
long time, you will eventually earn a profit. Besides, PGAS could only down
further from its current position if: 1. JCI is fall down, 2. There is serious
negative sentiments (so far, the negative sentiments associated to PGAS are
only 'jokes'), or 3. The company posted a profit decline in first quarter of 2015.
So here is my advice: If none of three conditions above that happened, then you
can still hold your shares. You may also buy more shares at the power prices.
But if one of the three conditions occurs, you better sell your shares, at
least half of them. So if you hold 1,000 lots of PGAS, you could sell 500 lots
and hold the remaining. In this way, if PGAS really down further, you can use
the proceeds from your sale earlier to later buy the stock at lower prices. But
if PGAS was rebound, then your loss is only half of what it should be. Good
luck!
PT Perusahaan Gas Negara (Persero), Tbk
Rating of Performance
in 2014: A
Rating of share price on
4,340: AA
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