The government’s efforts to reach its oil production target have cost PGAS 150 MMSCFD of gas supply to the state-owned power company PLN. The supply which was diverted to Chevron Texaco will help Indonesian government budget through achieving its oil production target. However, this also hurts the state coffers as the government must provide higher subsidy to PLN, which saw its gas supply being cut. It’s not clear if the gas diversion to Chevron will in the end beef up the government’s coffers, as it’s not c! lear if t he authorities have weighed the pros and cons the policy. We have a target price of Rp4,650/share, but the catalyst to achieve it, which is a change in policy of gas allocation, is unpredictable in nature. Upgrade to Buy due to 14.1% upside from the current price.
1Q10 outperforming our estimates. On operating level, PGAS 1Q10 achievement was 28% of our FY10F. As PGAS also enjoyed gains from its currency swap position and forex translation, 1Q10 net income has already recorded 35.4% of our FY10F. As it was shown in exhibit 1 on the back page, the over-achievement was due to higher-than-assumed gas distribution. Lower-than estimated transmission delivery was insignificant as transmission only contributed 8.6% of the total revenue.
Is 1Q10 the strongest Q in 2010? In March 30 PGAS formally announced the increase in average selling price of 15.8% from US$5.49/MMBTU to US$6.36/MMBTU. However, due to supply shortage (with several assumptions), we concluded that the increase is just enough to cover the average increase in cost of gas. The assumptions that we used: a flow of 900 MMSCFD (maximum flow previously guided by PGAS), and a deficit of 150 MMSCFD. We used US$2.6/MMBTU as average cost of gas for 750 MMSCFD (current flow with l! ow cost, a cost PGAS has for 900 MMSCFD if there is no shortage), and US$5.4/MMBTU as gas price to cover the deficit. Our calculation showed an increase in average cost of gas from US$2.6/MMBTU to US$3.07/MMBTU. That is an increase of 18.0%.
Fine-tuning forecasts, upgrade recommendation to Buy. We are expecting an improved environment where PGAS’ and PLN’s plight will be heard. Until then we do not see other catalyst to pull up the share price. Adjustments in earnings were due to lower tax rate from previously 30% to 25%. Our new DCF with WAC of 11.5% and terminal growth of 5% give a target price of Rp5,250/share, but we still prefer previous target price of Rp4,650/share due to the already rich PE valuations (19.6x PER10F and 18.6x PER11F ! at Rp4,650/share).
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