CLSA PGAS TP upgrade

Swati raised her TP for Perusahaan Gas (PGAS IJ) from Rp2,800 to Rp3,300 and maintains her BUY recommendation. Main reason for the upgrade is higher gas volume, which we believe will improve ROA and expand margins. Swati thinks that there is too much emphasis on gas pricing. But then as volumes increases fixed costs per unit decreases. Asset utilization will improve. To be on the conservative side, Swati assumes only US$0.5/mmbtu price increase not this year or next, but only in 2011.

Valuation-wise, PGAS is trading at 11.7x 10 CL PE, which is in line with the market. But PGAS growth profile is looking attractive, 35% CAGR from 2008-2011.

Key points from the report:
· We reiterate a BUY on PGAS raising our TP to Rp3300/share from Rp2800/share
· We expect PGAS to register 45% core eps growth this year and 31% in 2010CL.
· PGAS margins should improve on back of higher volumes as asset utilization improves. Fixed costs per unit should reduce and average costs should go down as proportion of cheap contracted gas increases. We have increased our distribution volumes forecasts FOR 2009CL by 8.5% from 670mmscfd to 727mmscfd.
· PGAS is expected to generate aggressive FCF going forward as volumes expand and capex requirements reduce. Higher dividend payout is possible but we have assumed 50% at this stage.
· We also see risks subsiding. Risks of gas price cuts should subside now that PGAS has been able to maintain its gas prices in the last two quarters. Oil prices are also moving higher again and our gas pricing assumptions are 65-70% lower than our diesel pricing assumptions.
· While state owned power company PLN is increasingly becoming a dominant customer of PGAS taking as much as 30-45% of PGAS distribution volumes going forward, PGAS also accounts for 40% of PLN’s contracted gas supply. Therefore we believe PLN will continue to pay market prices for gas.
· Demand for gas from industries should continue to increase. Minister of Industry expects natural gas requirement for industry should increase from 1863mmscfd currently to 2,585mmscfd by 2015.