Perusahaan Gas Negara
• Overlooked counter despite being cheapest in the region, with improving growth, ROE and yield
• Market may not have captured the potential for another gas price hike from upcoming electricity tariff hike.
• Maintain Buy for attractive valuation and promising outlook from new gas supply
Cheapest regional gas stock. Pgas is trading at 12x FY11F PE versus peers’ average of 18x, despite its more promising growth prospects. It also offers higher net dividend yield of 4% versus regional average of 2% for gas stocks. Its valuation discount is unwarranted as Pgas is poised to capture Indonesia ’s rising energy demand due to strong economic and infrastructure growth.
Upcoming electricity tariff hike may lead to another gas price hike. We expect more gas price hikes for Pgas after its recent 15% gas price increase effective 1 Apr 2010. Indonesia ’s government has approved an average 15% electricity tariff increase effective 2H 2010 for PT Perusahaan Listrik Negara (PLN). This bodes well for Pgas as it should mitigate any resistance from PLN towards a gas price hike by Pgas. Power plants account for 40% of Pgas’ sales and there is huge underserved demand due to resilient power demand growth of c.9% p.a.
New gas supply and another gas price hike would drive share price in the medium term. We expect Pgas to secure new gas supply following the recent amendment to regulations that mandates upstream natural gas producers to sell 25% of production to the domestic market. We expect adjustments to gas selling prices to go hand-in-hand with the new supply contracts. Our sensitivity analysis shows that every 10% increase (from our base case) in Pgas’ distribution volume would raise FY11F net profit by 11%.
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