DBS Perusahaan Gas Negara: Strong 2Q earnings (Buy; Rp4,00; TP Rp4,800; PGAS IJ)

At a Glance
• 2Q10 results in line with expectations
• On track to meet target sales volume and forecasts
• New gas supply contract supports higher volume and tariffs
• Promising outlook but trades at discount to regional peers’ valuations
• Maintain Buy and TP of Rp4,800, with 20% upside.

Comment on Result
2Q revenue grew 11% y-o-y to Rp5t.0tr on 9.3% and 11% increases in gas distribution and transmission volume to 827 MMScfd and 847 MMScfd, respectively.

2Q EBIT improved by a stronger 27% y-o-y to Rp2.5tr helped by 6ppt increase in operating margin following an average 15% hike in gas price for industrial and commercial users in Indonesia effective 1 April 2010. 2Q net profit (excluding forex loss on loan translation) grew by an even stronger 66% y-o-y to Rp1.6tr supported by both higher volume and tariff rates.

Outlook for PGAS is promising given its recent new gas supply contract with ConocoPhillip from Grissik field. Given PLN ’s urgent need for gas, we expect more new supply to come trough over the next few months. We estimate that every 10ppt increase in gas supply will boost PGAS FY10F net earnings by 11.4%.

Recommendation
PGAS is poised to benefit from Indonesia’s rising energy demand fuelled by strong economic growth and rapid infrastructure development. Maintain Buy and DCF-derived target price of Rp4800. PGAS is trading at attractive 12x FY11F PE versus peers’
average of 17x, despite its more promising growth prospects. It also offers higher net dividend yield of 4% versus regional peers’ average of 2%.

DBS Perusahaan Gas Negara: Laggard, but not for long (Buy; Rp3,950; TP Rp4,800; PGAS IJ)

Perusahaan Gas Negara

• Overlooked counter despite being cheapest in the region, with improving growth, ROE and yield
• Market may not have captured the potential for another gas price hike from upcoming electricity tariff hike.
• Maintain Buy for attractive valuation and promising outlook from new gas supply

Cheapest regional gas stock. Pgas is trading at 12x FY11F PE versus peers’ average of 18x, despite its more promising growth prospects. It also offers higher net dividend yield of 4% versus regional average of 2% for gas stocks. Its valuation discount is unwarranted as Pgas is poised to capture Indonesia ’s rising energy demand due to strong economic and infrastructure growth.

Upcoming electricity tariff hike may lead to another gas price hike. We expect more gas price hikes for Pgas after its recent 15% gas price increase effective 1 Apr 2010. Indonesia ’s government has approved an average 15% electricity tariff increase effective 2H 2010 for PT Perusahaan Listrik Negara (PLN). This bodes well for Pgas as it should mitigate any resistance from PLN towards a gas price hike by Pgas. Power plants account for 40% of Pgas’ sales and there is huge underserved demand due to resilient power demand growth of c.9% p.a.

New gas supply and another gas price hike would drive share price in the medium term. We expect Pgas to secure new gas supply following the recent amendment to regulations that mandates upstream natural gas producers to sell 25% of production to the domestic market. We expect adjustments to gas selling prices to go hand-in-hand with the new supply contracts. Our sensitivity analysis shows that every 10% increase (from our base case) in Pgas’ distribution volume would raise FY11F net profit by 11%.