BASML PGAS All worked out well

February volume drop not a concern, in our view
Sales volume in February came in at 857mmscfd, down 4.6% MoM. Meanwhile gas contracts not absorbed by customers rose to 1.4% from 0.5% in January and the number of customers who secured gas below the minimum payment rose to 246 from 159 in January. We suspect this was due to a volume drop that led to some customers’ allocation coming in below the minimum payment. We believe this volume drop is temporary and still maintain our FY10E volume guidance at 890mmscfd.

Gas flow from Pertamina and Conoco normalizing
The reason for the volume drop in February was because of a 60mmscfd lower gas inflow from Conoco, down from 380mmscfd in January. After last Thursday’s discussion between the government and PGAS (see 18 March 2010 report) we expect the volume drop to recover in April and PGAS will even get the extension of Pertamina’s ONWJ gas of around 30mmscfd. We understand Conoco has made commitments to recover its gas flow to 330mmscfd immediately before ramping up to around 360mmscfd. Apparently, the government will help Chevron find an alternative energy source (ie, coal). Pertamina was requested by the government to extend its gas contract with PGAS. With additional volumes of 40mmscfd from Conoco (from the February level), resumption of 30mmscfd inflow from Pertamina, and 50mmscfd from Lematang, PGAS continues to maintain its volume forecast of 800-900mmscfd.

No more cut in gas allocation; gas price hike to go ahead
Since PGAS’s gas volume is expected to recover, it will no longer reduce gas allocations to its customers by 20%. With customers’ sales contracts to be signed and effective by 1 April, PGAS is still expected to announce its new gas price within the next two weeks. A price hike of 10-15% and a 50% hike in the surcharge seem imminent with no meaningful push back from both the government and customers so far.

FY09 results to be released end of March
Boosted by a Rp1tn forex gain on a stronger Rupiah, we expect PGAS to book Rp5.6tn in headline net profit, up 794% YoY. EBIT is seen to rise 66% to Rp7.7tn.

Price objective basis & risk Perusahaan Gas N (PPAAF)
Our DCF-based PO of Rp4,300 is based on a WACC of 12% and a terminal growth rate of 4.5%. The key long-term assumption is terminal gas distribution margin of US$3.00/mmbtu and regulated toll fee of US$1.43/mmbtu for the SSWJ network. Risks: Changes in regulatory environment, execution delays and foreign exchange risks against the US dollar.