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Sunday, August 21, 2011

PT. Perusahaan Gas Negara - The End of Cheap Gas

by CLSA

Jayden wrote a note on Perusahaan Gas (PGAS IJ) today. This is a non-consensus call as we are the only SELL on PGAS on the street and Jayden’s analysis is thorough and gives good basis for the negative call.

This stock now does not really have a defensive profile and will see its abnormally high gas distribution margins normalized to those of regional gas utility peers. The company remains in the regulatory purgatory and this uncertainty will limit any re-rating potential in the near-term.

Key points from the report:

· Today we are re-initiating on PGAS with a SELL recommendation and a TP of Rp3,075 implying 8% downside.
· In early August upstream oil/gas regulator BPMigas called for a repricing of legacy gas contracts from upstream E&P players to PGAS to reflect market rates (currently PGAS is paying around ~USD2/mmbtu on key legacy contracts versus a US$5.5/mmbtu market price)
· This will considerably increase PGAS cost of sourcing gas while PGAS ability to pass-through the higher gas cost to its end off take customers (state utility PLN & Industry) remains very fluid and politically sensitive.
· Hence we see an end to the status quo of PGAS super-normal gas distribution margins which are abnormally high versus regional peers and downside exists as they inevitably normalize.
· In the face of this accelerated margin compression and regulatory uncertainty we re-initiate with a SELL. Our TP of Rp3,075 is derived from a probability weighted scenario analysis reflecting potential outcomes.

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