Government intervention: The set up of a specialized task force
In a recent conference call, Perusahaan Gas Negara (PGAS) announced that the government has formed a special task force comprising of several inter-related ministerial departments to monitor the thorny issue of domestic gas shortage, which has raised concerns on not only the outlook for PGAS’s distribution volumes but also widening budget deficit stemming from greater fuel subsidies. According to PGAS, report on the work progress of the task force is expected by the end of May. It is also worth noting that the recent signed agreement from Conoco to supply 300MMScfd of gas to Chevron was mainly driven by government urgency to meet Indonesia ’s oil lifting target in 2010. Additional incentive to re-allocate gas distribution was the higher price of more than USD5.0/MMBtu paid by Chevron compared to PGAS’s price of USD1.85/MMBtu. Nevertheless, PGAS’s management has no plan to revise its 2010 distribution volume guidance of 800MMScfd – 900MMScfd.
Key solution: Higher domestic gas prices equal to overseas prices
Based on recent developments, the shortfall of domestic gas supply in 2Q10 would be resolved in 2H10 in our view. Hence, to be conservative, we have cut our 2010 distribution volume to 800MMScfd (+1.0% y-y) from 860 (+8.6% y-y). We think that the key to reach a reasonable solution would hinge on the government’s effort to revamp the different pricing structure in the upstream market, as explorations would only occur once pricing has been set. According to industry sources, the export market pays an average price of USD10/MMBtu, double the average domestic price. This means that regulation to equate pricing structure would help accelerate domestic gas explorations and exploitations. Currently, the issue of gas price and shortage are on the top of the parliament’s list, although the imposition of a formulated gas price regulation may take longer than expected. However, we retain our stance that an upward trend in gas tariff remains foreseeable and inevitable.
Minimal 2010 earnings cut; Retain BUY with lower TP of IDR4,500
In line with our lower volume estimates, we have cut our 2010 revenue by 11.8% to IDR18.5t, translating to a flat revenue growth of 3% y-y. According to the management, 1 April’s higher tariff should offset lower volumes, allowing a slight revenue growth improvement in 2Q10. On the bottom line, higher than expected 1Q10 net interest expense caused 4.2% lower 2010 net profit to IDR6.3t, up just 0.4% y-y. We are of the view that in the long run, improved pricing structure coupled with the completion of the LNG receiving terminal in 2012 would support PGAS’ commitment to fulfill domestic gas demand, paving the way for the government to achieve its economic growth target. In terms of valuation, we have lowered our DCF-based target price (TP) by 10% to IDR4,500, helped by our lower risk free rate of 9% (WACC: 9.9%). 10% ytd share price underperformance has mostly priced in volume shortfall while 21% upside potential to our TP have us retaining a BUY.
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