Target price raised to Rp3,800
Our new TP of Rp3,800 reflects a lower cost of equity of 16% compared to 20% previously. PGAS has a sound business model and with the improving economic outlook we are more upbeat on the company’s long term prospects. Thus, we maintain our BUY recommendation on the counter with 24.5% potential upside.
Good 1Q09 performance
PGAS has a recession-proof business model and booked strong results in 1Q09 despite fears of declining demand. Crude oil prices may have seen sharp declines from their peaks last year, but gas remains a cheaper alternative even if the crude oil price is as low as US$40 per barrel. Thus, with the price of crude oil having since recovered to above US$60 per barrel, we are confident that demand for gas will remain firm. State electricity company PLN is one of PGAS’s major customers, and in April 09 PGAS was able to deliver 740mmscfd, or higher than the 1Q09 volume of 722mmscfd. Since the economy is now headed in the right direction – as reflected in declining interest rates, low inflation and a strong rupiah – economic growth should pick up going forward. This bodes well for gas demand.
Minor revisions
Despite the positive outlook for the company, we have slightly lowered our earnings estimates by 5.7% for FY09 and 1.4% for FY10. This stems from lower gas volume estimates for FY09 – our distribution gas volume estimate is reduced to 792mmscfd from 820mmscfd previously. For FY10, there is no change in our estimate. At the same time, however, we raise our FY09 transmission volume estimate to 780mmscfd from 750mmscfd previously to reflect the performance in 1Q09. Our gas selling price estimate of US$5.5/mmBTU is unchanged as the company does not expect to make any price increases this year.
Considering an LNG project
During our conference call with the company, PGAS said it was looking at the idea of investing in an LNG terminal. Through such a terminal, PGAS would be able to bring the gas from East Kalimantan to the island of Java where demand is high. It is considering three locations - West Java, Medan and East Java - with West Java being the most likely location. The company has not released any numbers in regard to the planned investment.
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