Mandiri Sekuritas PGAS: Gone are the catalysts

What PGAS reported in its FY09 results was history, which was less important for investors than the lingering uncertainties over the prospects of recovery in the gas supply from Conoco Phillips (CoPhi), its ability to continue controlling its distribution networks and securing large new gas supply. On the short term, we do not think the problem with the dwindling gas flow from CoPhi can be remedied. Therefore, we s! ee next c atalysts are still far away with limited visibility. Hence, our Neutral recommendation. At Rp4,225/share, PGAS is trades at 19.2x PER10F and 18.1x PER11F, a premium to market PER10F and PER11F of 16.4x, and 13.6x respectively. As the 2010 earnings will no longer get a boost from huge forex gains while gains from higher tariff will be mitigated by stronger rupiah and lower volume, current valuation already reflect a premium for its defensiveness.

West Java floating terminal (FSRT) provides PGAS with limited upside. The arrangement with Pertamina is to act as a gas merchant for 11.75Mt of gas for 10-11 years (1 Mt = 120-130 MMSCFD) from Total (Mahakam Block). For the additional supply (around 200 MMSCFD), PGAS will act as a toll operator. In North Sumatera, which is 100% PGAS, PGAS will act as a gas merchant. The upside for West Java FSRT where PGAS holds a 40% stake is limited. Those projects are expected to come on stream in 2012.

Another big supply for current network can only materialize in 2-3 years. Fields like Suban III CoPhi whose POD (plan of development) is still being evaluated by BP Migas needs 2-3 years to develop post its approval. In 2010-2012, PGAS can only expect additional 50 MMSCFD from Husky.

Therefore we see limited catalyst on the horizon. PGAS with its huge cash position (Rp6.6tn by end FY09) are looking to have a strategic stakes in two gas fields with the expectation of owning its offtake. It is unclear how much will be obtained from these two and the timeframe of the executions. With limited visibility and negative earnings growth in 2010 due to less forex gains and the rupiah’s appreciation, we are keeping our Neutral recommendation with Rp4,650 target price.