Perusahaan Gas Negara; Moving in the right direction; Buy; Rp3,975; TP Rp4,815; PGAS IJ - DBS Vickers

At a Glance
· 1Q11 net profit boosted by derivatives gain; core earnings in line
· 1Q distribution volume remains low; expect gradual improvement in 2H and sharp increase in FY13 from LNG terminal
· Higher gas volume and potential gas price hikes are key catalysts; maintain Buy

Comment on Result
Pgas’ 1Q distribution volume declined 7% y-o-y to 780mmscfd due to upstream supply disruption. Despite the lower gas distribution volume, 1Q revenue grew 6% y-o-y to Rp4.7tr following an average 15% hike in gas prices for industrial and commercial users effective 1 April 2010, which lifted average tariff rate to US$6.45/mmbtu. 1Q EBIT margin improved 2.4ppt y-o-y to 63.2%.

Pgas registered Rp0.4tr derivatives gain in 1Q due to strengthening of Yen against Rp. This is a non-cash translation gain of its Yen denominated loan (63% of loan portfolio). Excluding the derivatives gain, 1Q11 results came in within our and market expectations.

We believe gas supply disruption issue is a short term concern given the potential increase in supply (+30-40mmscfd) from ConocoPhillip from Jambi Merang field. The contractor for West Java LNG terminal has been recently appointed and the project is scheduled for completion in 1Q12. We estimated 23% increase in gas volume upon completion of the LNG terminal.

Recommendation
Maintain Buy for Pgas for its promising outlook and attractive valuation. Pgas is trading at a discount to regional gas peers, at 12x FY11F PE against peers’ average of 17x, and offers higher yield of 4% against peers’ average of 2%. Higher gas volume and potential gas price hikes are key catalysts.