JP Morgan - Buy Perusahaan Gas Negara (PGAS)

Buy Perusahaan Gas Negara (PGAS): 2Q10 results addressed earlier concerns about gas volume drop-off, that was caused by government intervention on gas allocation. Distribution volume is returning to normal but more importantly, average selling price jumped 5.4% QoQ, driving a 16% QoQ growth in EBIT. If we assume the 2Q10 EBIT of Rp2,456bn is sustained in Q3 and Q4, full year EBIT can reach around Rp9.5trn – this is 8% higher than consensus of Rp8.8trn and 25% higher than Stevanus Juanda’s number. If we assume the 2Q10 core net income of Rp1,746bn is sustained in Q3 and Q4, full year core net income can reach around Rp6.7trn – this is 5% higher than consensus of Rp6.4trn and 22% higher than Stevanus Juanda’s number. Bottom-line: concerns on 2011 outlook appear unfounded as forecast for the base year (2010) is being revised upward; the stock trades on attractive P/E multiple of 14.5x FY10 with a 3-4% dividend yield. The stock may re-rate on the back of a continuing decline in Indonesia 10YR government bond yield.