November 30, 2007
Perusahaan Gas Negara (PGAS.JK - IDR 16700.00) 1-Overweight
Initiation of Coverage
Flow with the gas, party has just begun
Investment Conclusion
We believe Perusahaan Gas is a good vehicle to capture growth from Indonesia`s
rising demand for gas. Its growing gas distribution business, backed by a
stable transmission business, translates into a strong three-year EPS CAGR of
39%. At 17.3x `09E P/E, it is trading at a discount to its regional gas peers
(23x `09E P/E). Value exists in the long term, in our view, as execution risks
subside. We initiate coverage of the company with a 1-Overweight rating and a
12-month price target of IDR19,400 (representing 16% potential upside).
Summary
* We believe Perusahaan Gas` growth profile looks promising, with 29% growth
in gas distribution volumes over `07-10E, backed by stable gross margins of
58-60% which is also among the highest in the region and seem sustainable,
given the discount at which the company sells gas relative to other fuels.
* Concerns center on capex delays and gas sourcing at competitive prices. As
the company begins to deliver and investor expectations are met, we believe the
stock may see a rerating. Our assumptions of US$2.9-3/mmbtu distribution
margin, 2.5% terminal growth, and no tariff hike post-2008 remain conservative.
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