We increase our target price for Perusahaan Gas Negara (PGAS) to Rp4,000 from Rp3,000 due to higher transmission fees, higher distribution and transmission volumes, and a decline in the weighted average cost of capital to 11.5% (from 13.5%) to reflect a lower risk rate. We maintain our OUTPERFORM rating on the stock, as we are confident about the company’s strong cash flow and increases in distribution volume.
Gas demand in Indonesia is expected to continue to remain strong, as the government is encouraging gas usage to replace oil in order to reduce fuel subsidies and costs. PGAS is well placed in bringing the gas from its source to consumers. The downside risk is the availability of gas supply and higher gas for the future gas supply. However, there is still room for PGAS to increase selling price as it remains 60% discount to the subsidised diesel price.
The stock is trading at a P/E of 9.4x for 2010E and EV/EBITDA of 5.5x for 2010E, below the regional averages of 13.1x and 9.5x, respectively. At our new target price, we value the stock at market price with a 2010E P/E of 12.5x.
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