Higher Than Expected Price Hike
PGN has raised gas price for nationwide customers by 15%, which is above our assumption of 5%. To adjust for this increase, we revise up our earning forecast for PGN by 5.8% - 12.8% for 2010F - 2012F despite lowering 2010F distribution volume assumption by 4.2% due to supply disruption from Conoco Phillips. We also lower our effective tax rate for PGN to 25%, as the company benefits from tax reduction. With these changes in our basket, DCF-derived target price is up 15.8% to Rp5,150 which translates into 2010F PER of 18.3x and EV/EBITDA of 11.2x. Maintain Buy.
Strong 2009 profit on lower tax rate
Last year PGN booked Rp8.24tn net profit, surging by 8.8 times from 2008 achievement helped by forex translation turnaround and a much lower tax rate of just 23%. This figure beat our numbers by 13.5% due to our higher tax rate assumption. While on the operational side, the company’s revenue and EBIT reached Rp18.0tn and Rp7.7tn or relatively in-line with our numbers of Rp17.7tn and Rp7.50tn respectively. PGN was granted 5% tax rate reduction during 2009 after the company’s free float shares exceeded 40%.
Higher than expected price hike
Starting from April 1, PGN implement new gas pricing for all industries and commercial customers, which up by 15% or translates into US$6.37/mmbtu. The company also implements the application of surcharge amounting to 300% for the volume exceeding maximum contract and payment guarantee to cover 2 months worth of gas usage for all customers. This new pricing scheme came above our assumption as we expect only 5% hike on the gas price. However, this condition reiterates PGN’s strong pricing power in the industry given the tight supply condition and substantial discount between natural gas price and diesel price.
Downside risk on distribution volume
After PGN declared that it currently faces gas supply disruption from Conoco Phillips, the company has secured 2 additional gas supply from Pertamina’s ONWJ field and Medco’s Kramasan field with total of 40mmscfd. With the additional supply, PGN’s supply disruption has moderated to around 30-40 mmscfd. However, it is still uncertain when the supply disruption proble will be resolved. In the meantime, we revise down our 2010F distribution volume assumptions by 4.2% or another 2 months disruption. Further downgrade is possible if supply disruption continues longer.
Earnings upgraded on price hike
We revised up our earnings forecast for PGN as actual gas price hike has exceeded our previous assumption. We also lower tax rate assumption for 2010F to 25% and raise cash cost assumption by 3.3% - 4.3% adjusting for the lower supply portion from Conoco Phillips. For 2010F-2012F, our revenue and net profit forecast is up by 4.6% - 11.6% and 5.8% - 12.8%, respectively.
Reiterate Buy with new target price of Rp5,150
Despite still facing supply disruption risks, we still acknowledge that PGAS has strong positioning in a blooming industry. Strong bargaining power in terms of pricing and volume allocations places PGN as the best proxy to ride the boom in domestic gas consumption. Our new DCF-derived target price suggests a figure of Rp5,150/share for PGN, up by 15.8% from our previous numbers. Offering a 27.3% potential upside from current price, we reiterate our positive stance on the counter. Buy.
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