Indonesia has massive gas reserves but yet a big deficit of gas supply (Domestic gas price now almost double of Henry Hubs). PGAS has been one of the best structural story being in the forefront of delivering stranded gas to gas hungry island of Java. However, the structural story (lack of gas supply) has recently been a bit of a doubled edge sword for gas. Its simply cannot secure any meaningful gas supply contract when demand is surging. LNG receiving terminals is a great solution but unfortunately still 3 years away. With the domestic consumption story taking off in Indonesia, PGAS will have limited operating leverage to benefit. Still great LT story at reasonable valuation but status quo (note we have not change our earnings forecast) means underperformance in the meantime. Patience required.
· PGas is a structural growth story of Indonesia’s shift to gas often marred with execution disappointments.
· We expect material new gas supply only in 2013 when LNG comes on-stream. There could be further delay on this as it will take 24-36months to complete the LNG project from date it’s commenced. Pgas has not signed any firm gas contract for LNG.
· We expect new contracts (piped and LNG receiving terminal to be signed in next six months but this does not mean actual gas supply will increase before 2012 as it takes time to monetize gas.
· We downgrade the stock to outperform in absence of any price and volume growth in foreseeable future. That said, we are not turning negative (although less positive) as the stock is cheap, trading at 10.7x 2011CL, with a solid balance sheet, 45% ROE, 22% ROA and 5.6% div yield.
· The stock should re-rate on progress of LNG receiving terminal and new volume contracts.
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