Perusahaan Gas (Outperform) - Supply may not act as constraint - MACQUARIE RESEARCH

Event
§ Following our note dated 21 February 2011 “PGAS – 2011 outlook likely to disappoint”, which highlighted the risk that distribution volumes stay relatively flat at 825-830mmscd in 2011, we have spoken with management and learnt that there is potential for distribution volumes to actually grow by 10% YoY and run-rate by 18% in 2011, driven by commercial operation of Jambi Merang field. However, we highlight that this is still subject to a gas arrangement for the Chevron oil field. This supports our Outperform view on the stock.

Impact
§ Potential for up to 150mmscfd of gas in 2011. This is mainly driven by:
o Commencement of operation at Jambi Merang field. Currently, we understand that the Jambi Merang field has delivered its first gas of 20-30mmscfd starting in mid March with the potential to go up to +/-80mmscfd. We expect 20-30mmscfd of gas to be supplied to Chevron and the remaining to be potentially supplied to PGN.
o Recovery of Conoco's gas supply. The commencement of Jambi Merang will help the company to re-obtain its full gas delivery from Conoco, which meant to run at 375mmscfd in 2011 (vs. 295mmscfd currently and in 2010).
§ …Leading to potentially 10% YoY growth in distribution volumes and 18% increase in run-rate. The company's distribution volumes currently run at 825mmscfd. Therefore, should we assume the Jambi Merang field and recovery of Conoco's gas supply to start flowing in the 2H11, we could see the average distribution volumes in 2011 to grow up to 900mmscfd and the run-rate to increase up to 975mmscfd at the end of 2011.
§ 2012 volumes outlook and acquisition. We see the potential for 2012 average distribution volumes to grow by 10-15% YoY to around 1,000mmcfd. This is mainly driven by 1) the distribution run-rate of 975mmscfd by the end of 2011, 2) 50mmscfd from the Ketapang gas field, 3) 25mmscfd from additional ramp-up from Chevron, and 4) 40mmscfd from the commencement of operation of the LNG receiving terminal at the 2H12. Further, we also understand that it is looking into potential for minority stake acquisition in return for gas off-take agreement.
§ Benefiting from potentially higher price. We understand that the company will benefit from continuous appreciation in the Rupiah (given 65% of pricing is done in US$ and the remaining in Rp vs. the gas cost, which is 100% US$). Further, the company also plans to apply preferential pricing (depending of source and cost of gas) and therefore allowing for premium pricing to some customers.

Earnings and target price revision
§ No change.

Price catalyst
§ 12-month price target: Rp 5,200 based on a DCF methodology.
§ Catalyst: Commencement of Jambi Merang field, increasing gas price

Action and recommendation
§ We reiterate our Outperform recommendation on the stock and Rp5,200 price target given strong long-term volume growth outlook and and attractive valuation trading on 11x 2011E PER (a discount to the market at 14x).Even assuming flat volumes YoY (vs. our current forecast of 10-15% growth), we still see the stock trading on 13x. This is especially given the company's strong dividend yield of 9% in 2011 (due to its potential 100% payout ratio).