CLSA Today is a BIG DAY for PGAS

Finally, the price hike is confirmed and the magnitude came in above our expectation. From April 1st, PGAS would increase gas prices nationwide from US$5.5/mmbtu to roughly US$6.5/mmbtu (assuming exchange rate of Rp9,100/USD). This is a 18% price increase. We have assumed US$6.1 in our forecast. What is the most important to note is for customers taking gas above daily contracted volumes, PGAS can add surcharge from 50% to a whopping 300%, meaning customers have to pay gas price of anywhere between US$8-19/mmbtu. This is massive and highlights the kind of pricing power PGAS has given its effective monopoly status and the chronic shortage of gas in this country. Industries desperately needs gas period. They are willing to pay as long as its still at a discount to diesel . Current diesel prices are more than US$18-19/mmbtu.

Swati's above consensus forecast of a sudden look conservative. BUY Tp5,500

Comment for Swati:
PGas has pricing power as gas prices are significant discount to diesel prices even for a gas price of US$6.5/mmbtu. Current diesel prices are more than US$18-19/mmbtu.
While PGas doesn’t need any prior government approval in theory it does informally discusses with the government before increasing prices. Support from downstream regulator, Minister of oil and gas for increase in prices suggest that PGas should eventually get back its Conoco Philips volumes which have been diverted to Chevron at the instruction of upstream regulator (BP Migas).
The current crisis on gas shortage re-enforces incredible demand for gas in Indonesia and should only encourage the Government support for PGas to find new gas sources as quickly as possible.
After lot of resistance from industries and noise on price increases PGas has been able to get price increases. This is how Indonesia works and we (and PGas) are optimistic that the issue with Conoco Philips will also be resolved sooner or later.
In worst case scenario, PGas doesn’t get back its Conoco Phillips volumes and doesn’t get any other gas sources as well we expect about 3-5% earnings downgrade. Nevertheless the stock is still very cheap trading at 14.4x 2010CL P/E. It offers 50% ROE and 20% ROA, highest in CLSA power sector coverage. Reiterate a conviction buy on PGas.