DBS Perusahaan Gas Negara: Buy; Rp4,050; TP Rp4,800; PGAS IJ

Riding on rising energy demand

· 1Q10 result was within expectations, on track to meet target sales volume and forecasts
· Expect stronger 2Q after 15% average gas price hike effective Apr10
· Maintain Buy and Rp4,800 TP, for stronger earnings ahead and reasonable valuation

DBS Perusahaan Gas Negara: Buy; Rp4,250; TP Rp4,800; PGAS IJ

Expect more price hike

At a Glance
• FY09 result exceeded expectation due to additional gas distribution in 4Q09
• Gas price hike reinforces our positive view; expect more volume and price-led growth
• Reasonable valuation with attractive 4% yield
• Maintain Buy with upgraded TP of Rp4,800

Comment on Result
Pgas’s FY09 revenue grew 41% following a 37% increase in gas distribution volume. Net profit improved significantly to Rp6.2tr, against Rp634b in FY08, due to higher distribution volume and Rp1.2tr forex gain against Rp2.5tr forex loss in FY08. Excluding forex effect, FY09 core profit grew 59% y-o-y due to higher distribution volume and estimated 3% increase in ASP.

Pgas’ FY09 net profit was 12% ahead of our and market expectations due to additional 60mmscfd gas distribution in 4Q09 to PLN’s plants in Cilegon and Tanjung Priok.
We upgraded FY10-12F net profit by between 8% and 18% after factoring in the 15% increase in average gas price effective 1 Apr 2010. We understand that the average cost for Medco’s new supply is US$5/mmbtu, which will kick in from 2Q10 onwards. We expect more price hikes over the next 1-2 years to adjust for higher input costs.

Recommendation
We continue to like Pgas for its volume and price-led growth. Valuation is undemanding at 13x FY11F PE against 53% ROE, FY09-12F CAGR of 12%, and net yield of 4%. The growing profitability and improving FCF yields (7%) is also likely to translate into higher dividends. Maintain Buy with upgraded DCF-derived target price of Rp4800 following the earnings upgrade.

DBS Perusahaan Gas Negara: Buy; Rp4,175; TP 4,200; PGAS IJ

High gas prices for industrial and commercial users

PGN announced yesterday that new gas pricing for all industrial and commercial customers will increase effective 1 Apr 2010. The adjustment is based on location of customers and monthly gas utilization. On a nationwide basis, gas prices for customers utilizing more than 300,000 m3/months will become US$4.30/MMBTU + Rp743/m3 or equivalent to c.US$6.36/MMBTU (US$1=Rp9,400). For West Jawa , the increase is as follows:
a. Gas selling price for customers using more than 300,000 m3/month is US$4,30/MMBTU+Rp750/m3 or equivalent to approximately US$6.37 /MMBTU

b. Application of surcharge amounting to 300% for the volume exceeding maximum contract

c. Payment guarantee to cover 2 months worth of gas usage for all customers
The price increase for PGN came in within our expectation but the quantum of increase, average at 15% on a nationwide basis, came in above our estimates. We estimate that the price increase will raise our FY10-12F net profit forecast by between 12-18%, and enhance our DCF-derived target price by 15% to Rp4,800. We will finalise our earnings forecasts and new target price after PGN’s FY09 results announcement this afternoon.

We continue to favour PGAS for volume and price-led growth. Valuation is undemanding at 12x FY11F PE against 44% ROE, FY09-12GF CAGR of 13% and net yield of 4%. The growing profitability and improving FCF yields (7%) is likely to translate into higher dividends. Maintain Buy.