A quote from a customer of PGAS:
“We are willing to pay US $8.0-8.5/mmbtu for natural gas as if we don’t somebody else will. The current supply situation is very tight” says a pulp and paper company.
Our analyst Swati upgrades her target price and earnings forecasts for PGAS. The new TP is Rp5,500 (previously Rp5,250) and we upgrade earnings by 6-11%. We assume 11% average gas price increase and adjust corporate tax rates from 25% to 20%. Our earnings forecasts are now 9% and 11% above consensus for 2010 and 2011 respectively. PGAS is a conviction BUY.
Key points from the report:
* Pricing differential will become more pronounced going forward as differential pricing will be based on cost of gas and demand from the market.
* PGAS has pricing power due to large gas deficiency of gas and significant discount of gas prices to its substitutes namely diesel.
* Our capex forecast: US$1bn for 2010-2011 combined. PGAS is looking to acquire minority stakes in upstream assets and build two LNG receiving terminals (first in Indonesia). We expect 4Q 2012 start.
* PGAS is the 13th cheapest power stock but has the highest ROE, ROA in 53 power stocks.
* Risk includes execution delays and cost over runs for LNG receiving terminal project.
* PGAS remains a structural growth story and is our conviction BUY. Our revised DCF target is Rp5,500/share which is also 15x 2011CL P/E.
* We have incorporated LNG in our model and done a scenario analysis for the pricing of LNG and legacy gas contracts.
* Valuation: PGAS trades at 13.8x 2010PER and 11.3x 2011 PER, in line with market valuation. We believe that PGAS should be trading at premium to the market, due to its high ROE and ROA, good stock liquidity, low gearing, strong structural story, and potential positive earning surprise.
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