AGM and gas supply cost jitters Event
§ The market is getting nervous regarding PGAS on the back of: Þ Uncertainty surrounding the election of management at tomorrow's AGM. Þ Concern that gas supply costs will increase materially on the back of higher gas prices from Pertamina (they are proposing a price of US$3.5-4.0 per MMBTU versus the current price of US$2.5). § In summary, we believe the risk-reward trade-off is favourable. Impact § Where there is smoke .there is fire - Market speculation suggests that we are likely to see a significant change in the board composition. However, it is likely that several of the candidates will be internal promotions, who could be viewed as unproven by the market. On balance, we see a change in management as an opportunity for improved corporate governance. § Market overly-concerned on gas supply contract - The market is concerned that Pertamina will raise its gas price unilaterally. It is important to note that this is only for one contract which has a repricing clause (as all other contracts are fixed price) and it includes a transmission element (so analysts shouldn't extrapolate this price). If agreed - this has the potential for immaterial downgrades to 2007, 2008 and 2009 earnings of only 4%, 3% and 1%, respectively. Furthermore, we forecast new gas supply contracts to be signed at US$4 per MMBTU. Therefore - we could actually see an upgrade to earnings if new contracts are signed at under US$4 per MMBTU. Earnings revision § No change. Price catalyst § 12-month price target: Rp12,000 based on a PER methodology. § Catalyst: 1) Increasing gas supply in July to 170 MMSCFD; 2) 10% price increase in June 2007; 3) change in board composition. Action and recommendation § We believe the stock is attractively valued on 9x 2008E PER. In our view, the stock deserves to trade on a market multiple of 11x implying a valuation of Rp12,000. We have a bull case of Rp14,000 and bear case of Rp9,000. Therefore, the valuation risk is on the upside. Reiterate Outperform and Rp12,000 price target. ----------------------------------------------------------------------------------- PRIVILEGED AND CONFIDENTIAL (Disclaimer) ----------------------------------------------------------------------------------- This e-mail message is intended only for the use of the individual or entity to which it is addressed and may contain information that is privileged, confidential and exempt from disclosure. If you are not the intended recipient, please do not disseminate, distribute, or copy this communication, by e-mail or otherwise, or take any action in reliance on it. Instead, please notify us immediately by return e-mail (including the original message in your reply) to [EMAIL PROTECTED], and then delete and discard all copies of the e-mail.
