Perusahaan Gas Negara: Buy; Rp3,875; TP Rp4,815 prev Rp4,800; PGAS IJ - DBS Vickers

Steady expansion

• New sources of gas from LNG terminals and larger domestic supply

• Larger capacity and potential gas price hike are key catalysts

• Attractive valuation with superior yields and ROE; maintain Buy

Strong capacity growth from new LNG terminals. PGN is finalizing plans for the construction of two new LNG receiving terminals in West Java and North Sumatra . Its distribution volume may increase to 1,050 MMScfd in FY14 (+23% from FY10) upon completion of the West Java terminal. PGN is also well-poised to receive additional domestic gas supply as new regulations mandate upstream natural gas producers to sell 25% of their production to the domestic market. All the new supply will be absorbed given the underserved domestic market and PLN’s efforts to switch to gas as part of its initiative to reduce costs.

Gas price hike after new supply. We expect a gas price hike in 2H11 as adjustments to gas selling prices are expected to go hand-in-hand with the new, higher-priced, supply contracts. Assuming a similar increase in net earnings given PGN’s cost-plus gas pricing mechanism, we expect 25% net earnings CAGR in FY10-14F. Our sensitivity analysis shows that every 10ppt increase in PGN’s distribution volume (from base case) would raise FY11F net profit by 11%.

Maintain Buy, raised TP. We reiterate our Buy call for PGN for its promising outlook and attractive valuation. Our DCF-derived target price is raised to Rp4,815 after rolling over our valuation base, despite increasing WACC assumption to 11.9% to reflect recent market rates. PGN is trading at a discount to regional gas peers, at 12x FY11F PE against peers’ average of 16x, but offers higher yields of 4% against peers’ average of 2%.