CLSA Big Report on PGAS, Let The Gas (and cash) Flow

Research Today: big report on PGAS, let the gas (and cash) flow

Our tenacious hardworking analyst Swati has just written a big report on Perusahaan Gas (PGAS IJ). This is one of our top calls in Indonesia. PGAS provides both robust cash flows with LT growth. Expect net profit to triple over 2008-12. PGAS also offers high ROE (more than 40%) and decent div yields (4.6% CL this year). BUY with TP of Rp2,800.

Low gas prices area a risk only if oil falls below US$25/bbl.

Reasons to like PGAS:
(1) Domestic oil production has been declining since 2000 after peaking at 1.67mbpd in 1991 due to the natural maturation of producing fields and a slower reserve replacement rate.
(2) Indonesia needs more gas. This is the future.
(3) More than 70% of natural gas reserves are offshore. As a solution, PGAS’ South Sumatra – West Java (SSWJ) pipeline connects supply in South Sumatra to demand in West Java.
(4) Gas is both cheaper and cleaner than diesel and fuel oil. Gas represents a 46% discount to diesel at US$40/bbl oil.
(5) PGAS dominates gas distribution in Indonesia with a 93% market share.
(6) State-owned power company PLN is in urgent need of gas and only PGAS has the ability to provide the gas to PLN via SSWJ pipelines.
(7) PLN may have a better bargaining position with PGAS in 2011 when their coal-fired power plants start to come on stream in 2010-11. But for now, gas demand from PLN will help to ensure volume stability.
(8) PGAS’ margin is already the widest amongst its Asian peers, but cheap gas contract + unregulated pricing structures mean margins will continue to expand until 2016CL.