Subject: Perusahaan Gas Negara: Well Worth the Wait, BUY
Well Worth the Wait * Management is improving transparency We see that the PGAS management has become more transparent. For instance, the progress report on the construction of the SSWJ pipeline is regularly published every two weeks. In addition, the management tries to be conservative in providing earnings guidance. Looks like they learned the lesson. * Significant construction progress The pipeline tie-in at Muara Bekasi and Labuhan Maringgai has been completed in early April. The pipeline is expected to turn operational at the end of June. Presently, the SSWJ pipeline supplies 50 mmscfd of gas, higher than the previous estimate of 30 mmscfd of gas. In addition, the West Java distribution pipeline which is 82% completed, is expected to turn operational in July. * Delay in price hike This year, PGAS will increase its average selling price from US$5.2/mmbtu to US$5.5/mmbtu. Although the price hike is expected to be delayed to end-3Q07 (from July), the price hike could nevertheless boost the stock. * Long-term pick, with short-term risk As a long-term investment, PGAS is one of our top picks. However, there is a risk that the share price could become volatile in the short term due to the higher-than-expected capex and delays in the construction of the Grissik-Pagardewa section and the West Java distribution pipeline. * Upgrade to BUY We have upgraded our recommendation to BUY on PGAS, which trades at 12.2x FY08 PE or 7.7x FY08 EV/EBITDA. Our target price is Rp13,000 (23% potential upside), at which the counter will be traded at 14.9x FY08 PE (9.1x FY08 EV/EBITDA). As we have become more confident in management's transparency, we have lowered our WACC assumption to 11% from 15.4%. In our view, PGAS will enjoy hefty long-term earnings after construction of the SSWJ pipeline is completed, which would offset the risks of delays and higher capex. Analyst Andrey Wijaya (62 21) 3983 1457 [EMAIL PROTECTED]
