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%.

DBS Indosat: Fully Valued; Rp5,950; TP Rp4,000; ISAT IJ

FY09 disappoints consensus
At a Glance
• FY09 net profit fell 20% y-o-y to Rp1.5tr, within our estimate but 9% below consensus
• As expected, aggressive network rollout in FY08-09 led to higher depreciation and interest charges in FY09
• Our forecasts and FULLY VALUED call are under review pending a conference call
• Expect selling pressure because result was below market

Comment on Results
As expected, aggressive network rollout in FY08 (capex up 39%) resulted in 21% and 24% y-o-y jump in depreciation charge and net interest expense, respectively, in FY09. These led to a 20% slump in FY09 net profit to Rp1.5tr. But note that this is supported by Rp1.7tr lumpy FX gain, and we do not know if there were other lumpy items (e.g. depreciation jumped 34% q-o-q in 4Q09). 4Q09 net profit fell 88% y-o-y (down 89% q-o-q) to Rp48b, which is almost breakeven for the quarter. Positively, 4Q09 EBITDA margin improved to 48.6% from 44.9% in 3Q09 on the back of 11% revenue growth led by seasonal factors. Net gearing jumped to 124% in Dec09 vs. 89% in Dec08 as free cashflow remained in the red.

Recommendation
Pending a conference call next week, our forecasts and recommendation are under review. We assumed conservative FY10F revenue growth of 5% (vs. Excelcomindo’s 15% target) and 47% EBITDA margin (vs. ISAT’s 48% in FY09). Each 1ppt increase in EBITDA margin could lift FY10F net profit and price target by 10%, due to ISAT’s low net margin. Net gearing is expected to remain high at 120% in FY10F vs. 124% in FY09, as we only expect ISAT to achieve neutral free cashflow next year.