JP Morgan - Perusahaan Gas Negara Downgrade to UW on severe monthly volume decline

We downgrade to UW and cut our Dec-10 PT to Rp3,400 due to severe monthly volume decline: We downgrade PGAS from N to UW due to a severe monthly volume decline from 906MMScfd in Jan-10 to 773MMScfd in Mar-10. We think the decline in volume could surprise investors and send the stock down, resulting in short-term underperformance. The current share price implies 14.4x FY10E P/E compared with our FY10E P/E estimate of 16.1x. If the market’s earnings forecast is lowered to our level, at 14.4x P/E, the price would be Rp3,476. Averaging it with our new PT derived from our DCF (Rp3,412) value, we derive our new Dec-10 PT of Rp3,400.

• Consensus revenue forecast implies volume of 935MMScfd in FY10:
Assuming similar level transmission revenue and distribution rate of US$6.03/MMbtu, we estimate the consensus revenue estimate of Rp20 trillion implies an average FY10 volume forecast of 935MMScfd. With 1Q10 average volume at 840MMScfd and Mar-10 volume of 773MMScfd, we believe consensus’ implied volume of 935MMScfd and FY10 earnings forecast of Rp6.5 trillion are likely to be too high. With these, we believe
that consensus earnings estimates will be lowered to our level.

• 2Q10 and FY10 earnings could disappoint: In 2Q10, we believe that distribution volume could fall below 800MMScfd, assuming flat M/M volume in Apr-10. If Apr-10 volume declines further, the 2Q10 volume could decline even further. From our channel checks, we assume that gas from Lematang will only reach 50MMScfd by Dec-10 and currently the starting flow rate is 15MMScfd. Considering the average volume of 791 MMScfd in 2Q09 vs. the expected 792MMScfd in 2Q10, 2Q10 earnings could disappoint, leading to disappointing FY10E earnings.

• Short-term pressure; long-term investors could consider establishing position on weakness: Despite the potential short-term pressure on the share price, the long-term story of PGAS should be intact; our DCF valuation still indicates a fair value of Rp4,000. With these, long-term investors could consider establishing positions if the share price falls below Rp3,400.