A top-down perspective
�� Current gas price is still at a deep discount
Despite price increases in the past several years, PGAS selling price is
still at a:
1)31% discount to Japan LNG price, and 2) 73% discount to domestic diesel
price.
We continue to like PGAS top-down story. SSWJ completion should further
cements its position as the leader in the domestic gas industry (85% of
transmission and 93% of distribution).
�� Still confident on further price increases
Our conversations with PGAS management and the government officials at the
site leave us with more confidence on how beneficial the formula will be for
PGAS. We adjusted the ceiling in our scenario to a 40% discount to domestic
diesel price and assume the 10% incremental increase to start in 2008.
�� Lower project risk
An earlier than indicated completion of Grissik-Pagardewa is an improvement on
PGAS expectation management. Since no more land acquisition is necessary for
the parallel pipeline, we are confident there is less project delay risk.
�� Valuation
We reduced our EPS for 2007 to take into account potential dilution from
government debt to equity conversion and upgraded EPS for 2008 and 09 by 8 and
7% to Rp909 and Rp1,528. We reiterate our Buy rating, with upgraded DCF-based
PT of Rp18,000 (WACC 13.8%, LT growth rate 2%). Despite recent price run, the
counter trades at P/E08E of only 15.9x, while its peers trade at 28.5x.
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