Streak of misfortunes
● Indonesia’s coal mining sector has been under pressure amid a declining coal price environment. As the sector has a structural issue with an oversupply situation, we do not expect coal prices to recover soon. We reflect this in our coal price assumptions of US$86/t for this year and US$91/t for 2014, with a long-term assumption of US$100/t.
● Despite the structural problem, we prefer Bukit Asam (PTBA), given its improving railway transportation capacity which had constrained growth. PTBA’s coal is of high grade and the company has sizeable reserves for over 100 years; it is among the lowest cost producers in the region and has net cash with no debts. For FY14/FY15, we expect PTBA’s production to grow 22%/14% and profit to grow 21%/ 51%.
● The stock trades at P/E of 10.0x on 2013E and 8.3x on 2014E, the lowest level since the 2008 crisis. PTBA always traded at a premium to its peers. If our growth numbers are correct, the stock is trading at FY15E P/E of 5.7x. While FY15E is still far off, it highlights the disconnect between growth and valuation for this stock.
● We have an OUTPERFORM rating on PTBA with a Rp17,000 TP, based on a target P/E of 12.5x, or 25% higher than the sector average of 10x. Click here for full report.
Indonesia coal companies plan to grow output
Despite the decline in coal prices, Indonesia’s coal output has continued to grow. The country’s exports peaked in 4Q12 and witnessed a strong pick-up in April 2013. In Indonesia, large coal companies are capable of moving their operations to lower strip ratio areas to reduce cost. Being among the lowest-cost coal producers in the region, they are still making cash margins of over US$20/t in a low coal price environment.
Coal surplus continues
We expect the oversupply situation to continue at least until next year. Demand, however, is not really much of an issue. Demand growth is still expected to come from China and India. As long as seaborne coal prices are lower than domestic prices, China should continue to import coal. India has structural problems because of its infrastructure issues and power pricing—which are worsened by the weakening Indian rupee. On the positive side, the Indian government intends to bail out the power sector, allowing power plants to pass through the imported coal cost, and enabling power plant projects to renegotiate their PPAs for making them feasible. We reflect this condition in our coal price assumptions of US$86/t for 2013 and US$91/t for 2014, with a long-term coal price assumption of US$100/t.
Increasing regulatory risks
The possibility of China banning the import of low-quality coal would hurt Indonesia as China accounts for 30% of total exports, which are mostly low-grade coal. Indonesian coal is normally used for blending due to its low sulphur and ash levels. The Indonesia MoF is also considering to increase royalty for IUP holders to 10%, from 3-7% currently. These could hurt small, inefficient coal companies, which we estimate will take out around 100 mn tonnes (around 12%) from the seaborne coal market. This should be positive for coal prices in general, except for low-grade coal, the price of which could remain under pressure.
Stock pick: We prefer Bukit Asam
Coal mining and mining contracting stocks have been underperforming the JCI following the decline in coal prices. The underperformance has continued despite coal prices being flat. We believe that the coal price has bottomed out, but it may stay at these levels for a while. In Indonesia’s coal sector, we prefer Bukit Asam (PTBA, TP Rp17,000, OUTPERFORM) due to its low cost structure, volume growth potential with improving railway transportation, net cash position, high grade coal and large reserves for over 100 years. Our second in our pecking order is Indotambang (ITMG, TP Rp26,000, NEUTRAL). We maintain our NEUTRAL ratings on Adaro (ADRO, TP Rp900) and Harum (HRUM, TP Rp3,500).
Source/Extract/Excerpts/来源/转贴/摘录: Credit Suisse
Publish date: 24/07/13