PGN launches pre-marketing

Indonesian gas transmission and distribution company launches $400 million IPO.

Joint bookrunners ABN AMRO Rothschild, Credit Suisse First Boston and Danareksa Sekuritas launch pre-marketing for an IPO in state-owned, gas transmission and distribution (T&D) company PT Perusahaan Gas Negara (PGN) at the beginning of this week.

Under the transaction's current timetable, the domestic roadshow will kick off on November 10, followed by an international roadshow on November 12. The international offering will comprise roughly 70% of the deal and is scheduled to price on December 1. A retail IPO for the remaining 30% will take place from December 8 to11.

Trading will then commence two weeks later.

The exact ratio of primary and secondary shares will not be fixed until the end of pre-marketing. But the government has indicated its intention divest a 30% stake raising proceeds of $250 million to $300 million. On top of this, the company also now hopes to raise funds and with the inclusion of a greenshoe and redshoe for a further 15% each of the transaction, specialists say gross proceeds could reach $400 million.

Alongside the three leads, co-leads on the international tranche are CLSA and JPMorgan.

Syndicate research is using a basket of regional T&D stocks as comparables for the transaction, since there is no direct comp listed in Jakarta. However, whereas some houses have highlighted benchmark sector stocks such as Thailand's PTT and Korea's Kogas, others have used smaller growth plays from China such as Panva Gas and Xinao Gas.

PGN combines attributes from both camps. Unlike the smaller stocks, it will rank as one of the top 10 MSCI weightings from Indonesia and as such should have some appeal for index players. But unlike PTT and Kogas, PGN has a much greater emerging markets profile and growth figures to match those of the Chinese companies.

As a result, syndicate research is said to span a wide EV/EBITDA range of five to nine times 2004 earnings, although the top end of the range is felt to be the outlyer. By region, US T&D companies are said to currently average a 2004 EV/EBITDA multiple of nine times, European companies seven times and Asian companies eight times. The overall average for the Indonesian market is five times.

Individually, companies such as PTT stand at 6.8 times, while Kogas is at 7.6 times and Xinao Gas 7.3 times.

On a 2004 P/E basis, US T&D companies are said to average 16 times, Europe 12 times and Asia 10 to 11 times. PTT has a forecast P/E ratio of 9 times, Kogas 9.2 times and Xinao Gas 11 times.

The other major difference between stocks such as PTT and Xinao Gas is that the more established players all pay dividends. PTT currently has a dividend yield of 4.9% and Kogas 5.6%. PGN has also indicated that it will pay a dividend and although the pay-out ratio has not yet been finalised, the yield is said likely to mirror the Indonesian market average of 3.5%.

Key sales drivers of the equity story are PGN's unassailable market position and price stability. The company has a 91% market share of gas sales in Indonesia and its major suppliers have all signed contracts running for 20 years, with ship or pay clauses. The tolling charges they pay to run gas through PGN's pipes accounted for 18% of the company's total revenue in 2002.

However, while the price PGN pays for gas is very secure, its ability to source extra supplies is less certain given that demand has outstripped supply for the last two years. However, encouraged by the removal of fuel oil subsidies, which is encouraging end users to switch to natural gas, the company has embarked on a major expansion programme.

Analysts forecast a 68% increase in capex over the next five years. This will cost the company up to $1 billion and cause a sharp spike in debt levels. According to Standard & Poor's debt to capitalization is likely to rise from 44% to 70%, although the company has said that this should be the peak.

PGN currently has 2,547KM of gas pipelines serving six separate distribution networks via three transmission pipelines. Its main pipeline is the 536KM Grissik to Duri pipeline and it is just finalising a 476KM Grissik to Singapore pipeline, which is expected to shop $9 billion in natural gas to the City State over a 22-year period.

PGN holds 60% of Transportasi Gas Indonesia (TGI), the company building the pipeline, with the remaining 40% held by Transasia consortium led by Petronas and Conoco.

In many ways, PGN is a direct play on Indonesian growth forecasts. In 2002, for example, 82% of its revenue came from end sales and 98% of these users were industrial companies, whose demand is directly tied to GDP. In turn, about 70% derived from three main industry groupings - glass and ceramic manufacturers, chemicals manufacturers and metals.

One of investors' main concerns is likely to be the short-term nature of the company's end user contracts, which only run for about two years, although they are on a take or pay basis. Overlapping this is an element of regulatory risk as the government has just established a downstream oil and gas regulator, BPH Migas to set consumer prices and tariffs for network access.