DBS Perusahaan Gas Negara

Volume driven growth
• 3Q09 earnings better than expected
• Better than expected volume is key driver
• Revised up our FY09-10 earnings by 12-11%
• Upgrade to HOLD with TP of Rp3,335

3Q09 earnings above expectation.
Perusahaan Gas Negara (PGAS) reported its 3Q09 earnings of Rp1,154bn, down 43% q-o-q. Earnings decrease mostly caused by lower FX gain in 3Q09 compared to 2Q09 period. Stripping out the FX figure, core earnings increased modestly by 4% q-o-q.

Q-o-q volume grows modestly.
Total revenue is flat q-o-q while production cost is lower by 2% q-o-q, thus gross profit also edged up slightly by 2% q-o-q. Flat top line performance was due to relatively flat gas sales price and tariff coupled with only modest growth in volume.
Gas distribution rose 3% q-o-q while gas transmission volume remained flat.

Adjusting earnings estimate.
After incorporating higher gas distribution volume for FY09 and FY10 by 8% and 2% each respectively, we raise our FY09-10 earnings by 12% and 11% each respectively.
Upgrade to HOLD. Following the earnings revision coupled with shifting our valuation base year to 2010, we raised our target price to Rp3,335 and upgrade our recommendation to HOLD. Our target price was derived using DCF method with assumed WACC of 12% implying 16.1x FY10 PE. Going forward, we believe PGAS will face strong challenges in securing additional gas supply at a competitive price to secure margin.