• Stay BUY and IDR1,500 TP, 28% upside and c.9% yield. We recently visited Perusahaan Gas Negara’s gas operations in Palembang to see its household gas network and interact with customers. Feedback has been positive – customers say they are saving money by using piped gas compared to LPG. Household gas has seen rapid growth from USD5m to USD20m or a 45% CAGR from 2018 to 2022. We believe the rising contribution from the household gas segment will improve the social impact of PGAS’ ESG rating.

• Household gas – an LPG alternative. A customer we spoke to said that, since using piped gas in her home, she has been able to save around IDR90k/month. PGAS charges IDR10k/cu m (c.USDc2.40/mmbtu), with the minimum volume at 4m cu m/month or about c.IDR135k/month (vs the LPG refill of IDR220k for a 12kg cylinder). PGAS Palembang manages and runs the 1,113.7km gas pipeline from Musi Banyuasin in the north to Ogan Komering Ulu in the south, while serving 43,337 customers. The company continuously maintains its relationship with household customers to ensure safety and satisfaction.

• Demang Lebar Daun offtake station a key infrastructure. We also visited PGAS’ Demang Lebar Daun offtake station, established since 1998, which forms a key infrastructure to ensure gas distribution to customers. Operated by around 23 employees, the offtake station receives gas supply from Pertamina Exploration & Production or PEP of around 2mmscpd and at 20bar (290psi) pressure. The station then distributes an average 1.6mmscfpd through a 3.8bar (55.1psi) polyethylene pipeline and 10 bar (145psi) steel pipeline. For safety precautions, PGAS reduces the gas pressure further to only 0.03bar as it enters households. In 2023, PGAS distributed 1.7mmscfpd of gas in Palembang, generating USD5.9m.

• Still a long way towards fulfilling the Government’s target of 2.5m households connected. With the Prabowo Subianto-Gibran Rakabuming alliance leading the (unofficial) quick poll, we believe there will be a potential subsidy cut to channel the funds for the free lunch programme. As such, it could greatly affect the household gas segment. Initiated since 2019, the Ministry of Energy & Mineral Resources (MEMR) targeted 2.5m household gas connections by 2024 (currently: 900k users). MEMR estimates that the 4m household gas connections could reduce LPG imports of up to 603m tonnes pa thereby saving IDR 630bn pa in LPG subsidy, lowering household energy spending by IDR386bn pa and decreasing the country’s oil & gas trade deficit by IDR 2.5trn pa.

• ESG. We apply a 4% ESG discount to derive our IDR1,500 TP. This is given PGAS’ 2.8 ESG score vs the 3.0 country median.

Source: RHB Research - 20 Feb 2024