JP Morgan - PGAS 2Q10 strong but in-line with consensus. Flat revenue and profit in FY11E

• 1H10 net income in-line with consensus: PGAS reported 1H10 net income of Rp3,206B; up 0.6% Y/Y. 1H10 core net income came in at Rp3,230B up 23.4% Y/Y. Operating profit: which is free to forex swing and other distortions, grew by 16.2% Y/Y in 1H10. PGAS 1H10 operating profit is inline with consensus’ (52.2%) full year operating profit expectation of Rp8,750B but ahead of JPM’s (60.3%) full year operating profit expectation of Rp7,566B. With the results in-line with consensus’ expectation, we view that the stock is likely to trade sideways (with a positive bias); while there is an upside risk to our FY10E earnings forecast by about 5%.

• 2Q10 is strong: Subtracting 1Q10 result, 2Q10 core net income came in at Rp1,746B; up 24.6% Y/Y and 17.7% Q/Q. The reason is that 15% price hike in 2Q10 offset the 13.5% appreciation in Rp at the revenue level; while Rp appreciation led to lower COGS and expanded margin. Gross profit expanded by 633bp Y/Y and 520bp Q/Q. Below the operating profit line; forex and swap gain (loss) cause reported 2Q10 reported net income to actually decline by 27.0% Y/Y and 19.0% Q/Q.

• Flat profit growth in FY11E: PGAS CEO: Mr. Hendi Santoso, recently was quoted by Bloomberg that FY11E revenue and profit in FY11E are likely to be flat Y/Y due to constraints in the supply of gas. Our inquiry confirmed that this is the current view that PGAS is communicating to the market and it is currently working on signing some new contracts. Considering that consensus FY11E earnings forecast implies a 14.8% Y/Y growth, we view that downside revision to FY11E could lead to share price
underperformance. Currently, our FY11E EPS is about 12.9% below that of consensus, and is a key reason behind our UW stand.

• Maintain UW and Dec-10 PT of Rp3,400: At this point, we are in the process of reviewing our model. Meanwhile, on the back of flat and lower than expected profit in FY11E, we maintain UW and our Dec-10 PT of Rp3,400 on PGAS. Our PT is derived from a combination of DCF and PE methods.