BAS-ML INDO PGAS raised PO to Rp 3200

Daisy raised PO by 12% to Rp3200 as the stock could rerate further driven by greater visibility of its structural growth story and improved execution. PGAS earnings growth story remain intact driven by gas substitution, power shortage, and volume ramp up to state-owned power PLN.

We see PGAS’ portion to PLN to increase from 25% as of 9M08 to 56% by end-09. With PLN as core customer will ensure more stable demand as we est' PLN’s gas consumption will grow at a 3-yr CAGR of 16%, vs PGAS 7% CAGR for 2008-12. Upside surprise to come from higher volume. 3M08 volume averages to 720mmscfd, vs MLf 720mmscfd for FY09. March alone saw volume jumped to 760mmcfd and PGAS expects further ramp-up of at least 60mmscfd in 2H09. 10% higher volume could translate to 12% higher earnings on Daisy's forecast.

PGAS will also be eligible for govt's tax incentive in 2010, which allows 5ppt tax reduction for listed companies with free float >40% and with no single minority investors owning >5%. Recent strengthening of Rp also help reduce volatility on its bottom line and share price performance. At 11x '09 PE, PGAS trades at 20% disc to our DCF and 27% disc to regional utility comp. If we were to use straight-line depreciation (like its peers), the stock would trade at 9x PE or 40% disc to regional.