DBS Perusahaan Gas Negara: Buy; Rp4,175; TP 4,200; PGAS IJ

High gas prices for industrial and commercial users

PGN announced yesterday that new gas pricing for all industrial and commercial customers will increase effective 1 Apr 2010. The adjustment is based on location of customers and monthly gas utilization. On a nationwide basis, gas prices for customers utilizing more than 300,000 m3/months will become US$4.30/MMBTU + Rp743/m3 or equivalent to c.US$6.36/MMBTU (US$1=Rp9,400). For West Jawa , the increase is as follows:
a. Gas selling price for customers using more than 300,000 m3/month is US$4,30/MMBTU+Rp750/m3 or equivalent to approximately US$6.37 /MMBTU

b. Application of surcharge amounting to 300% for the volume exceeding maximum contract

c. Payment guarantee to cover 2 months worth of gas usage for all customers
The price increase for PGN came in within our expectation but the quantum of increase, average at 15% on a nationwide basis, came in above our estimates. We estimate that the price increase will raise our FY10-12F net profit forecast by between 12-18%, and enhance our DCF-derived target price by 15% to Rp4,800. We will finalise our earnings forecasts and new target price after PGN’s FY09 results announcement this afternoon.

We continue to favour PGAS for volume and price-led growth. Valuation is undemanding at 12x FY11F PE against 44% ROE, FY09-12GF CAGR of 13% and net yield of 4%. The growing profitability and improving FCF yields (7%) is likely to translate into higher dividends. Maintain Buy.