A quote from a customer of PGAS:
“We are willing to pay US $8.0-8.5/mmbtu for natural gas as if we don’t somebody else will. The current supply situation is very tight” says a pulp and paper company.
Our analyst Swati upgrades her target price and earnings forecasts for PGAS. The new TP is Rp5,500 (previously Rp5,250) and we upgrade earnings by 6-11%. We assume 11% average gas price increase and adjust corporate tax rates from 25% to 20%. Our earnings forecasts are now 9% and 11% above consensus for 2010 and 2011 respectively. PGAS is a conviction BUY.
Key points from the report:
* Pricing differential will become more pronounced going forward as differential pricing will be based on cost of gas and demand from the market.
* PGAS has pricing power due to large gas deficiency of gas and significant discount of gas prices to its substitutes namely diesel.
* Our capex forecast: US$1bn for 2010-2011 combined. PGAS is looking to acquire minority stakes in upstream assets and build two LNG receiving terminals (first in Indonesia). We expect 4Q 2012 start.
* PGAS is the 13th cheapest power stock but has the highest ROE, ROA in 53 power stocks.
* Risk includes execution delays and cost over runs for LNG receiving terminal project.
* PGAS remains a structural growth story and is our conviction BUY. Our revised DCF target is Rp5,500/share which is also 15x 2011CL P/E.
* We have incorporated LNG in our model and done a scenario analysis for the pricing of LNG and legacy gas contracts.
* Valuation: PGAS trades at 13.8x 2010PER and 11.3x 2011 PER, in line with market valuation. We believe that PGAS should be trading at premium to the market, due to its high ROE and ROA, good stock liquidity, low gearing, strong structural story, and potential positive earning surprise.
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Kamis, 18 Maret 2010
CLSA INDO: PGAS upgrade, conviction BU update1
Good Morning,must read our UPGRADE ON PGAS today.
All the stars are aligned for our HIGH CONVICTION pick in the big cap space. It is the fastest growing utility stock but yet one of the cheapest in our universe with a ROE of 50%, ROA of 20%+ and a rapidly deleveraging its balance sheet that has a cash balance of 8% of its market cap as of end of 2009. This cash machine will be generating a whopping US$1.1bn+ of FCF by 2012 or 10%+ FCF yield.
Compelling gas supply / demand dynamics
Indonesia is going through a structural shift from diesel to gas usage. At this point, there is simply not enough gas to go around. The acute gas shortage occurred because the larger portion of the gas supply from PGas had been diverted to local power plants and surging demand from industrial users (gas still gas is still 1/3 of diesel prices and shortages of electricity from PLN). This is not going to change anytime soon as the govt focuses on build up of gas fired power plants.
* West Java, PGN cannot meet gas demand for 342 industrial companies, 181 companies in East Java and 124 companies in North Sumatra. The worst deficit has occurred in West Java. PGas has received strong protest from industries in the province.
* The shortage of gas supply effecting industries could result in layoffs of at 342,000 workers in West Java because of the declining production. This is only from West Java. Thousands of workers employed by 164 factories in Serpong may lose their jobs
* State power firm PLN still face gas shortages despite increase in gas supply from PGas. PLN estimates that they are still in deficit of about 1000mscfd of gas, more than PGas 2010CL distribution volumes.
Gas shortgages = Pricing Power
We have every reason to believe that PGAS is about to raise their gas selling prices. In fact, we learned from industrial users they have already been informed by PGAS about and impending gas price hike. We understand that it would happen in 2Q and price increase could be up to 20% or to $6.7.
* PGAS have not increased their prices since mid 2007. Average increase in their prices from 2001-2007 was CAGR of 10%. Just to keep up with inflation, there is a strong case for PGAS to raise their prices.
* In fact, some users are already paying close to $6 for gas. It is a take it or leave it situation.
Govt reforms is supportive of gas usage + higher prices
Indonesia is expected to suffer a shortage of 2,540mmscf of gas this year more than double the current gas distribution by PGas of about 900mmscfd. Reforms have been implemented to address the problems we are suffering from. Chairmen of the gas association said that there has to be serious effort to increase gas production. Gas producers have to be incentived to develop gas resources. This means higher gas prices! Progress seen up to date:
* Raising electricity tariffs to end users (so PLN won't need subsidy = more power = more investment in industries)
* Higher tariff means PLN can now pay more for electricity from IPPs(= more IPPs)
* IPPs pay more for gas prices
* President SBY signed a presidential decree for guaranteed power off-take from IPP producers to State-owned PLN.
* Government decision to allow 70% of Donggi Senoro LNG to be exported (30% will be for domestic usage such as PLN and fertilizer companies) is a landmark case showing govts support of the gas industry.
All the stars are aligned for our HIGH CONVICTION pick in the big cap space. It is the fastest growing utility stock but yet one of the cheapest in our universe with a ROE of 50%, ROA of 20%+ and a rapidly deleveraging its balance sheet that has a cash balance of 8% of its market cap as of end of 2009. This cash machine will be generating a whopping US$1.1bn+ of FCF by 2012 or 10%+ FCF yield.
Compelling gas supply / demand dynamics
Indonesia is going through a structural shift from diesel to gas usage. At this point, there is simply not enough gas to go around. The acute gas shortage occurred because the larger portion of the gas supply from PGas had been diverted to local power plants and surging demand from industrial users (gas still gas is still 1/3 of diesel prices and shortages of electricity from PLN). This is not going to change anytime soon as the govt focuses on build up of gas fired power plants.
* West Java, PGN cannot meet gas demand for 342 industrial companies, 181 companies in East Java and 124 companies in North Sumatra. The worst deficit has occurred in West Java. PGas has received strong protest from industries in the province.
* The shortage of gas supply effecting industries could result in layoffs of at 342,000 workers in West Java because of the declining production. This is only from West Java. Thousands of workers employed by 164 factories in Serpong may lose their jobs
* State power firm PLN still face gas shortages despite increase in gas supply from PGas. PLN estimates that they are still in deficit of about 1000mscfd of gas, more than PGas 2010CL distribution volumes.
Gas shortgages = Pricing Power
We have every reason to believe that PGAS is about to raise their gas selling prices. In fact, we learned from industrial users they have already been informed by PGAS about and impending gas price hike. We understand that it would happen in 2Q and price increase could be up to 20% or to $6.7.
* PGAS have not increased their prices since mid 2007. Average increase in their prices from 2001-2007 was CAGR of 10%. Just to keep up with inflation, there is a strong case for PGAS to raise their prices.
* In fact, some users are already paying close to $6 for gas. It is a take it or leave it situation.
Govt reforms is supportive of gas usage + higher prices
Indonesia is expected to suffer a shortage of 2,540mmscf of gas this year more than double the current gas distribution by PGas of about 900mmscfd. Reforms have been implemented to address the problems we are suffering from. Chairmen of the gas association said that there has to be serious effort to increase gas production. Gas producers have to be incentived to develop gas resources. This means higher gas prices! Progress seen up to date:
* Raising electricity tariffs to end users (so PLN won't need subsidy = more power = more investment in industries)
* Higher tariff means PLN can now pay more for electricity from IPPs(= more IPPs)
* IPPs pay more for gas prices
* President SBY signed a presidential decree for guaranteed power off-take from IPP producers to State-owned PLN.
* Government decision to allow 70% of Donggi Senoro LNG to be exported (30% will be for domestic usage such as PLN and fertilizer companies) is a landmark case showing govts support of the gas industry.
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