CIMB PGAS Quick takes - Cracks are showing

(PGAS IJ / PGAS.JK, UNDERPERFORM - Downgraded, Rp4,075 - Tgt. Rp4,000, Utilities)

Downgrade to UNDERPERFORM from Neutral. PGAS's CEO commented yesterday about lower supply from one major supplier and said that no tariff increase was planned. This is contrary to market expectations of a tariff increase, which has helped lift the share price of late. We think this issue about existing supply is likely to persist, adding another risk to the company's operational outlook on top of the lingering uncertainty over tariff increases and future new supply. The lower volumes could also cap the benefit of the planned "lower quota, higher surcharge" scheme. Even in our best-case scenario of a tariff increase effective Jun 10 plus higher surcharge, the EPS impact would be tempered by lower volumes. We are increasing our FY10 EPS by 1.7% but lowering post-FY10 EPS by 6-8%. This reduces our DCF-based target price (WACC 12%, LTG 4.5%) from Rp4,400 to Rp4,000. We believe any share price uptick in reaction to a tariff hike, if any, would be a good opportunity to sell.