Credit Suisse PGAS

• To encourage more gas use, Perusahaan Gas Negara (PGAS) is set to cut surcharge for customers in West and East Java. Customers are currently charged 50% additional on price for the use of gas more than 100% of the contracted volumes, due to limited gas supply. They are also required to pay ‘take or pay’ of 80%, if they consume below this level.
• PGAS has the track record for reducing distribution volumes target. However, we now believe that 2009 is the major growth year as the company has secured gas contracts to PLN (Perusahaan Listrik Negara), the state-owned power company (not listed), which would take one-third of its distribution volumes.
• The gas price decline is unlikely as PGAS’ selling price remains at 40% of the subsidised diesel price. Please note that industrial customers have to pay for non-subsidised diesel. The weakening in oil price, however, provides negative sentiment on the stock which we believe should be taken as an opportunity to accumulate.
• We assume no gas price increase. PGAS’s gas pricing is set by the BOD decree. Customers are charged based on the contracted volumes and the location to reflect the distribution fee. PGAS currently has more gas supply than what it sells. Therefore, to encourage more gas use by customers, the company cut the surcharge for additional gas over the contracted volumes.
• The company also claims that very few customers use more than the contracted volume, in fact they tend to use below the contracted volume. Therefore, the lifting of surcharge would not have a significant impact on its average realised price.
  We have taken a conservative approach by assuming no gas price increase for this year and next. Since the purchase prices from the upstream oil and gas companies have increased, we have assumed that PGAS would be able to pass on the increases in gas costs to its customers, to maintain distribution margins. Increasing distribution volume. PGAS has the track record for missing its own volumes target, primarily due to the delay of the South Sumatra West Kava (SSWJ) pipeline project.
• We expect the company to have strong distribution volume growth, primarily from the gas sales contract with PLN.

Danareksa Jasa Marga

Definitely more certainty
The government has signaled that it has the resolve to settle land acquisition problems related to the development of new toll roads. In this regard it has issued two regulations. The first deals with revolving funds for land acquisition and the second covers “land capping” in regard to land prices. The good news is that we now have strong evidence that these regulations are actually working (as evident in the development of two of Jasa Marga’s projects). As such, there is much greater certainty in regard to investment returns. Going forward this should increase investor appetite for toll road construction.

New interchange drives growth
Jasa Marga currently operates 11 toll road sections. Traffic on nine of them has reached the “maturity stage”, while traffic on the two relatively newer sections (Cipularang and JORR) has greater room to grow. Nonetheless, traffic on the Jakarta Cikampek section grew by 12.3% yoy in FY08, or much faster than the total growth of 2.2%. This was thanks to the new interchange at Cikunir (in the area of Bekasi). Likewise, we also expect traffic on the Jakarta Tagerang section to see a boost when JORR North W2 is completed in 2Q10. More integration will generate more traffic.

“Six plus one” projects in the pipeline
Jasa Marga has “six plus one” projects in the pipeline. Three sections are part of the Java Toll road network, while the remaining sections are part of the Greater Jakarta toll road network. At the same time, Jasa Marga is also looking to acquire the Surabaya-Mojokerto section with a minimum stake of 55%. Its partner would be Wijaya Karya with maximum ownership of 20%. Total capex is estimated to reach Rp3.3tr in FY09, comprising of routine and periodic expenditure, capacity expansion and new toll road development.

Changes to our forecast
With the updates provided by Jasa Marga, we have altered our scenarios for the three new toll roads (the Bogor Ring road, Gempol Pasuruan, and the Semarang Solo project), and we have shifted back our expected commencement dates for the commercial operation of these toll roads due to delays in land acquisition. Despite full support from the government, land acquisition is still time consuming. To be on the conservative side, we do not include the other three new toll roads into our forecast. As a result of our forecast changes, our core income estimate for FY09 is 4.4% higher due to higher interest income although core profits are 15.4% lower in FY10 due to the delays in the commercial operation of the toll roads.

Reiterate BUY
Although we retain our BUY recommendation on the counter, our target price is cut to Rp1,540 as the expected commencement dates for the commercial operation of the new toll roads are put back due to land acquisition delays. However, full support from the government in regard to the land acquisition has nonetheless reduced the investment risk. Jasa Marga has benefited from revolving funds and land capping – an encouraging sign for the industry.