Perusahaan Gas Negara (PGAS-BUY-IDR3,925-TP:IDR4,600) On an acquisition trail - Bahana

Price catalysts: LNG receiving terminals & gas field acquisition; BUY
We believe that price catalysts for Perusahaan Gas Negara (PGAS) would surface in line with the possibility of the company’s plan to secure a gas field. This coupled with the progress on the development of the LNG receiving terminals should ensure PGAS to lock in substantial volumes post 2012. We view PGAS’ recent underperformance (exhibit 5) as an opportunity to accumulate, particularly given 4.2% dividend yield. Thus, while we trim our DCF-based TP to IDR4,600 on lower earnings, PGAS remains a BUY.

Minor cut in distribution volumes on continued supply shortage
Without new gas supplies, PGAS will post flat 2011 operating performance, causing us to revise down our distribution volumes slightly by 1.2% to 834MMScfd (+1.2% y-y) from 844MMScfd (+2.4% y-y) previously. While the government continues its attempt to accelerate upstream production and allocate gas supplies to the domestic market, no major breakthrough has thus far occurred. Hence, we expect 1Q11 distribution volumes to fall some 3% y-y to around 815MMscfd compared to its peak of 840MMscfd (+16% y-y) in 1Q10. In the longer-term, however, implementation on new government regulation for requirement on domestic market obligation (DMO) could potentially benefit PGAS. Thus, although competition to secure new additional supplies would intensify, we believe that PGAS would be able to obtain a small fraction (25MMScfd-50MMScfd) of the excess supplies.

Lowered 2011-12 operating profit by 6-7%
As we have cut our 2011-12 distribution volumes, we have lowered our 2011-12 revenues by some 5% respectively to IDR19.8t (+0.2% y-y) and IDR22.8t (+15.1% y-y). On the operating front, we expect higher 2011 estimate in blended cost to USD2.7MMBtu due to extensions of several existing contracts with costs of more than USD5/MMbtu to negatively impact operating profit. Thus, we have reduced our 2011 operating profit by 6.7% to IDR9.1t (+0.8% y-y) and by 6.1% to IDR10.5t in 2012 (exhibit 6). It is worth pointing out that in 2012, rising gas costs could potentially allow PGAS to further raise tariffs, which we have conservatively assumed at 5% vs. 15% in 2010. Finally, lower 2010 tax rate and early IDR2.2t debt repayment debt has us retaining our 2011-12 earnings at IDR7.0t and IDR8.1t respectively.

2010 results: FX & derivative losses undermined bottom line growth
Despite 18% y-y growth in 2010 operating profit, FX/ derivative losses caused flat 2010 bottom line of IDR6.2t (+0.2% y-y), but still in line with our and consensus estimates. As JPY debt accounted for 49.2% of PGAS’ 2010 long-term debt of IDR10.7t, the weaker IDR to JPY (-8%) negated the positive impact of the stronger IDR to USD (+5%), resulting in IDR369b FX loss, not to mention derivative losses of IDR562b from the JPY hedging transaction, bringing total loss to IDR930b. On a more positive note, PGAS booked lower tax rate of 20% (Government ruling No. 81) versus our forecast of 25%, partially supporting 2010 earnings.