Credit Suisse - Perusahaan Gas Negara - Strong cash flow, higher distribution volume

Event:
Perusahaan Gas Negara (PGAS) reported below-market FY08 earnings due to foreign exchange translation losses, but strong 1Q09 earnings from higher distribution volume. Cash flow remained strong from the increases in distribution volume and the expansion of the distribution margin on lower gas costs.

View:
Distribution and transmission volumes continue to increase and the distribution margin has been maintained. Despite the translation losses, the company should have strong cash flow. We believe PGAS is one of the few Indonesian companies that should see revenue growth and strong cash flow this year, despite the slowdown in the economy.

Catalyst:
The strong 1Q09 results and increases in volumes give confidence in the company’s growth and strong cash flow this year. We expect distribution volume to continue to increase with more gas flowing to Perusahaan Listrik Negara (PLN), the state-owned power company (not listed). There could be a threat to the dividend payment, due to significantly low net profit in FY08. However, we believe that the government, which
owns a 52.32% stake in PGAS, will request a higher dividend payment.

Valuation:
We have retained our OUTPERFORM rating on the stock and target price of Rp3,000. The stock is now trading on a P/E of 9.2x 2010E and EV/EBITDA of 5.3x 2010E, which are at a discount to the regional average. We believe PGAS will be one of the few Indonesian stocks to have growth and strong cash flow this year.