Maintaining Buy (1L), TP up to Rp2850 — We believe the stock is still attractive at current 10.6x PE, given a strong growth oulook (42% 3-year EPS CAGR). Despite the possible announcement of a big FX loss in 2008 reported earnings, we expect such a loss to be non-cash in nature, and see any negative share price reaction as an opportunity to Buy.
4Q08 operating performance slightly below expectation, but long-term outlook remains attractive — PGAS’ 2008 distribution volume of 578mmscfd was 6% below our xpectation. This suggests weaker demand from industrial customers in 4Q08 (sales to industries accounted for 83% of sales in 2008). While this may present short-term weakness, the long-term growth outlook still appears attractive (18% CAGR) given PGAS' established network in the main Java market and attractive competitiveness of domestic gas price.
Expect big FX loss to be non-cash; watch out for derivative exposure — Amid the sharp depreciation of IDR in 4Q08, we see FX translation and derivativerelated losses as one of the potential issues affecting reporting earnings given PGAS' US$1.1bn of foreign-currency denominated debt. While we anticipate these to be non-cash unrealized losses, we see any increase in the company's derivative position as a possible additional risk to the financials.
Lowering operating assumptions — In view of the slightly lower 4Q08 numbers,we have lowered our distribution volume expectation to 720mmscfd. We also lower our price increase expectation to 2.5% (from 5% prev) since we expect a price increase may only happen in 3Q08. Taking into account our weaker IDR assumptions, the net effect of the revised operating assumptions sees +14-21% 09-10E net profit adjustments and increase in DCF-based TP to Rp2,850.
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