Perusahaan Gas Ex growth - Downgrade UNDERPERFORM - CLSA

We downgrade PGas to underperform as the stock goes ex-growth for next two years. There is no material new gas supply and we do not expect price increases. We cut earnings by 6-12% as we cut volumes. The days of super margins are also over and PGas margins on LNG will be much lower than current distribution margins as it will be a cost plus business model. Potential delays on LNG are also possible. Underperform

Pgas losses volumes again
The current weakness in the stock price is because of the partial diversion of Conoco Phillips volumes from PGas to Chevron. PGas’s current contracted amount from Conoco Phillips is 375mmscfd, but Conoco Phillips is delivering only 300mmscfd currently to PGas. BP Migas confirmed that PGAS is unlikely to get the gas from Conoco Phillips back anytime soon. We cut volumes earnings by 6-12% for 2011CL. PGas expects to recover these volumes in 2H11 when Chevron can get gas from Jambi Marang.

West Java LNG receiving terminal construction has started
PGas has started construction of West Java LNG receiving terminal and this should complete in 2H12. The current gas supply agreement (HOA only) is of 130mmscfd, (1/3 of the capacity) with Bontang. The GSA should be signed soon. The pricing structure will be cost plus. The pricing to the customers will be determined by cost of gas (floating) + operating expense + part of the
investment cost + PGas’s distribution margin.

New supply?
Press report states that Indonesia will start importing 4.5mn tonnes of LNG starting in 2013. This is positive as the government is giving indication that importing gas is an option to meet domestic gas shortage. In the past, importing gas has been political as Indonesia being a large producer/exporter of gas has to import for domestic needs. This opens up potential for Pgas to
import gas. While growth will be slow next two years, growth profile longer term is intact as LNG construction has started and will complete end 2012.

Valuation
We downgrade PGas to underperform as the stock goes there is little growth for next two years. We cut earnings by 6-12% as we cut volumes. Our price target is DCF derived. The days of super margins are also over and PGas margins on LNG will be much lower than current distribution margins as it will be a cost plus business model. Our price target is 20% discount to DCF.