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Cruising ahead
JCI : 5,712.30
Reiterate our coal price benchmark of US$65 per
Analyst
ton William Simadiputra +62 2130034939
william.simadiputra@id.dbsvickers.com
Coal miners are still reluctant to raise output
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ton in various coal price cycles. We like ADRO for its low cost-
centric operational strategies which will benefit hugely from Coal price at Qinghuangdao port(RMB per ton) ‐ LHS
the coal price uptrend. We like ITMG for its steady dividend Source: Bloomberg Finance L.P, DBSVI
stream and remaining coal reserves of nine years. We also have
a BUY rating for PTBA as its lower mining contractor services
fee will help boost its margins.
Reiterate our coal price benchmark to US$65 per ton also see limited supply expansion from the major coal producing
Reiterate our coal price benchmark to US$65 per ton in 2017 countries such as Indonesia – which will also provide a short
and beyond, as we believe China’s proactive domestic supply term to medium-term cushion to coal prices. So far, Indonesia’s
control will curb any potential excess supply in the market, thus domestic coal miners are still conservative on their production
limiting the coal price downside. China’s supply control is volume expansion target and overall mining expansion strategy,
positive for China domestic and global coal prices, given that which means that we will not see any excess supply from the
China is a primary market for global coal producers. The seaborne market going to China, which could dilute the impact
domestic supply dynamics will also impact its coal imports, in of its production volume intervention.
view of the fact that China will only import coal in the event of
supply shortage. China production control implies long-term coal price
band of US$65-75 per ton
Newcastle coal price trend China will proactively manage coal supplies via maintaining its
800 120 coal miners’ working days at 270-330 days to keep China’s
750 110 domestic coal supply under control and to prevent excess
700
650
100
supply. We believe such policies will keep the long-term coal
90
600 price at US$65-75 per ton, which offers a win-win situation for
80
550
70
both coal miners and coal-fired power plant operators. This
500
60 could ultimately benefit China as a whole in view of the lower
450
400 50 default risk for local coal miners and the availability of
350 40 reasonably priced coal to fulfil the country’s energy demand.
300 30
Apr‐16
Apr‐17
Feb‐16
Sep‐16
Feb‐17
Jun‐16
Mar‐16
Jul‐16
Dec‐16
Mar‐17
Aug‐16
Oct‐16
Jan‐16
May‐16
Nov‐16
Jan‐17
May‐17
500
As China accounts for half of global coal consumption and
400
Post price spiked,
production, it has the power to influence global coal supply- production days
300 relaxation introduced to
demand dynamics and coal prices via its domestic policies mainly Pro longed over cooling down the market
200 supplies coal market,
via coal production control. Soft global coal supply addition in dragged coal price
100
the past three years has also strengthened China’s position as a
0
global coal power house. The Chinese government also controls
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the country’s largest coal producers such as China Shenhua
Corp and China National Coal Group. Both account for around Coal price at Qinghuangdao port(RMB per ton) ‐ LHS
20% of China’s national total coal output. Source: Bloomberg Finance L.P, DBSVI
Proportion of China supply and demand vs the world China’s decision to intervene on the supply side when coal
7000 prices hit a low of US$50 per ton last year shows that China was
6000 not comfortable with the emerging systemic default risk
5000
confronting its local miners. Moreover, the Chinese government
also relaxed the coal production day limit to 330 days after coal
4000
prices spiked to above US$85 per ton in December last year.
3000
Besides the proactive supply controls mentioned above, China’s
2000 largest coal miners such as China Shenhua Corp and China
1000 National Coal Group Corp have also inked coal contracts with
0 major coal power plant generators such as China Huadian Corp
Coal consumption (mn tons) Coal production (mn tons) and State Power Investment Corp at around Rmb550-600 per
China Others ton, or US$77-84 per ton.
Source: Bloomberg Finance L.P, DBSVI
Coal miners are still reluctant to raise output ADRO and ITMG, has remained flat this year. Meanwhile,
Besides China’s production control, slower-than-expected coal PTBA’s production volume is subject to its railway capacity
supply expansion from the major seaborne markets (mainly from development this year.
Indonesia) could also help sustain coal prices at the current level
of US$75-80 per ton in the short term. The low confidence Pamapersada’s strip ratio and coal production volume
among coal miners has led to slower-than-expected coal supply 12 12
2 2
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ton on the back of supply shortage, despite the end of seasonal
restocking in January. Historically, the first quarter has the Monthly coal production volume (mn tons) ‐ RHS Strip ratio (X) ‐ LHS
lowest production volume due to the rainy season. The rainy Source: Bloomberg Finance L.P, DBSVI
season translates into lower productivity and production volume
for coal miners. The chart below shows the quarterly production Our surveys with a number of smaller coal miners in Indonesia
trends of ITMG, ADRO, PTBA and HRUM, with the first quarter have also revealed that they are skeptical on the how current
usually being the lowest production volume period before coal price level could sustain going forward. Furthermore, the
production gradually ramps up in the remaining quarters smaller coal miners continue to operate defensively in order to
towards meeting the companies’ full-year targets. The avoid heavy exploitation of their mining assets. Moreover, their
production trend is also supported by the demand trend, where operational flexibility will also be inferior to that in previous
the coal demand historically is the strongest in 4Q due to winter years, given that their efficiency has hit the limit and their
restocking, on the back of higher power plant utilisation during thinning reserves pose future operational challenges.
the winter season.
Moreover, the smaller coal miners faced difficulties in securing
Quarterly production trend (mn tons)
financing from the banks, which are still in the midst
35.0
restructuring non-performing loans (NPL) and are reluctant to
30.0 offer new financing packages to the new miners. Banks have
25.0 reduced their exposure to the mining-related sectors in view of
20.0 the rising NPL. Our survey suggests that the banks are still
reluctant to offer credit to mining players.
15.0
10.0
Loans to mining-related sectors and NPL trend
5.0 160,000 8%
- 140,000 7%
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
120,000 6%
ADRO ITMG HRUM PTBA
100,000 5%
Apr‐12
Apr‐13
Apr‐14
Apr‐15
Apr‐16
Jul‐11
Jul‐12
Jul‐13
Jul‐14
Jul‐15
Jul‐16
Oct‐11
Oct‐12
Oct‐13
Oct‐14
Oct‐15
Oct‐16
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
The lack of financing also means that the miners could not Indonesia running out of coal reserves by 2030, as Indonesia’s
secure machinery and equipment to restart their mining activity. remaining coal reserves stood at only around 8bn tons in 2015.
UNTR’s machinery sales volume was relatively low in 4Q16 and This is only 40% of the average estimated reserves in the
1Q17 despite the coal price uptrend (see chart). UNTR is aiming previous three years, due to the limited exploration activities on
for 2,700 units (23% y-o-y) of machinery sales in 2017 despite capital spending scale-back and aggressive cost cutting via
the improving coal price volume outlook. UNTR’s relatively soft lowering the strip ratio to below the optimum concession long-
machinery sales volume performance means there is not much term strip ratio target.
capital redeployment to the sector.
Slow production also seen in other countries
UNTR’s monthly machinery sales Cyclone Darby could hurt Australia’s national production by
600 140 10%, given the disruption in railway transportation and overall
500 120 mining activities. Meanwhile, the lower Australian coal tonnage
100 could not be offset by the production of the closest alternative
400
80 coal producing countries such as Indonesia whose local miners
300
60
have chosen to stick to a defensive strategy, as highlighted
200
40
previously.
100 20
Other coal producing countries in the world are also not adding
0 0
much to global production capacity, given the capital constraints
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Jan‐12
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380
360
Global cash cost per ton changes (2015)
0% 0%
340
320 -2%
-5%
300
-7%
2013 2014 2015 2016 2017A -10%
-12%
Indonesia coal production (mn ton) -15% -13% -13%
-14%
-17%
-18%
Source: ESDM, DBSVI -20%
-20%
-25%
-26%
Indonesia will be the largest coal consumer and net importer in -30%
Venezuela
Chile
Vietnam
Australia
Colo,bia
Rusia
Canada
Indonesia
United States
South Africa
Mozambique
Plans to cap global pollution are rolling out Global coal-fired plant capacity
The Paris and Cancun agreements will track the reduction of 500 1,200
coal-fired power plant capacity over the next decade in order to 450
1,000
400
achieve the desired lowering of carbon emission and global 350
800
temperature. The agreements strive for zero emission in the 300
long term, which translates into a zero coal-fired power plant 250 600
200
target to maintain the desired global temperature (see chart). 150
400
100
200
World emission scenario according to both agreements 50
‐ ‐
East Asia SE Asia Africa and Middle EU28 Canada/US
East
600
Southeast Asia and East Asia (mainly China) have the largest
coal-fired power plant capacity in the world. Both regions also 400
will be the key market for thermal coal mines in the next 200
construction. Beyond Asia, only the US has a meaningful coal- Coal Natural gas Geo thermal Diesel fuel (oil)
fired power plant capacity, but going forward we believe this Source: PLN, DBSVI
will be gradually replaced by cleaner energy sources, as there is
no material coal-fired power plant capacity under construction. We do not deny that China is gradually shifting away from coal,
but the IEA is forecasting that China’s coal consumption will still
increase by 2.6% y-o-y until 2019, or an annual growth of
100m tons. In its World Energy Outlook 2015, the IEA also
believes that China will remain the coal giant in terms of being
both the producer and consumer until 2030. New coal-fired
power plants are expected to enter the pipeline and the existing
China power plants are relatively new vs. their useful life of 40-
60 years and it is unlikely that the coal-fired power plants will
cease operation before hitting their salvage value.
The same case happened in the US before. China’s plan to 35MW status (IPP only)
replace coal as the key component in its energy mix will need Planning
11.0%
some time. The US needed more than 10 years to reduce coal-
fired power plants’ share of the energy mix from above 50% to
the existing level of around 30%, and the progress has only Non construction
(contracted)
accelerated in the past five years. The tipping point for a lower Procurement
39.0%
coal mix in its power generation capacity arose from lower 24.0%
natural gas prices in the past three years – thus reinforcing the
benefits of gas, i.e. better efficiency and lower carbon emission.
Comissioning
US electricity generation by source 2.0%
Construction (signed
PPA)
24.0%
key driver for the SEA coal market is Indonesia, whose demand 10.0
is expected to reach 250m tons – equivalent to the coal
8.0
consumption size of EU 28 – by 2040, according to the EIA.
6.0
Coal will remain in demand for countries that need a lot of 4.0
energy to fuel their growth ambitions such as India, SEA nations
2.0
and even China. Moreover, we do not foresee strict
environmental regulations in SEA countries, as the key priorities ‐
Phillipines
South Korea
China
Indonesia
India
Hong Kong
Thailand
Vietnam
Singapore
Japan
Malaysia
targets.
Indonesia’s domestic coal consumption government to achieve the targeted electrification ratio and
90 power capacity to fuel economic growth.
80.3
80
69.8
70 PLN and IPPs’ net capacity addition (MW)
57.6
60 53 16,000 14,905
50 46.9
14,000
39.5
40
12,000
30
10,000
20
8,000
10
6,000 5,461
4,830 4,414
0 3,777
4,000
2011 2012 2013 2014 2015 2016 2,658 2,348
1,471 1,357 1,720
2,000
Indonesia coal consumption (mn tons)
‐
Source: BP Statistics , DBSVI 2015 2016 2017 2018 2019
PLN IPP
historical level when coal prices hit a current similar level of coal miners can get to enjoy earnings stability, and optimise
US$72-US$75 per ton. We believe that the market thinks coal their mining operational activities and reserves life to deliver
prices should correct sometime this year as the seasonally low robust returns to their shareholders.
production period of 1Q17 has ended, coupled with the lack of
significant demand catalysts post winter restocking. Coal price performed well in 1Q17 on undemanding valuation
and stronger-than-expected 4Q16 (thanks to higher-than-
PTBA’s five-year forward PE band expected coal ASP). The coal miners’ positive performance
continued in 1Q17, as seen in ADRO and PTBA’s financial
results, given that coal prices in 1Q17 have also trounced
consensus expectation. Besides the seasonally low production
period of 1Q17 keeping coal prices above US$75 per ton, the
onset of cyclone Darby that will potentially affect 10% of
Australia’s production volume this year has led to a persistent
share price rally for coal miners. Such a development has also
buoyed coal prices to US$85 per ton.
1.3
1.1
1.0
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0.5
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PTBA ITMG ADRO JCI
per ton coal mined is the most critical factor for coal stocks, and 0 0%
Jul‐08
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not just coal prices.
Share price (Rp) ‐LHS NPATM ‐ RHS
ADRO’s share price and profitability performance
Source: Bloomberg Finance L.P , company, DBSVI
ADRO (Rp) ‐ LHS NPATM (%) ‐ RHS
2,500 18%
16% Key risk
2,000 14% The key risk to our coal price assumption is faster-than-expected
12% coal supply expansion in the ex. China region, which implies
1,500
10%
that the impact of China’s proactive supply control will not be as
8%
1,000 strong as in 2H16, given the upcoming volume numbers will
6%
4%
lead to a dilution of China’s production volume contribution to
500
2% global supply, and China’s influence over domestic and global
0 0% coal prices.
Jul‐08
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Jul‐16
Jan‐09
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Jan‐11
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Jan‐16
Jan‐17
15,000 10%
10,000
5%
5,000
0 0%
Jan‐09
Jan‐10
Jan‐11
Jan‐12
Jan‐13
Jan‐14
Jan‐15
Jan‐16
Jan‐17
Jul‐08
Jul‐09
Jul‐10
Jul‐11
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Jul‐13
Jul‐14
Jul‐15
Jul‐16
Company Guides
What’s New Retaining our FY17/18 forecast at this point. We believe that we
Maintain BUY and TP of Rp2,100 have already baked in a conservative coal production volume
assumption. Our FY17 assumptions include operational EBITDA
Our TP implies higher PE of 11.7x
forecast of Rp1.1tr and NPAT forecast of Rp430bn which are
Sticking to our earnings forecast in FY17/18 pretty much in line with management guidance and 1Q17
Stronger earnings growth ahead financial performance.
Valuation:
We are maintaining our BUY rating with DCF-based target
price of Rp2,100 (WACC of 12.1% and terminal growth rate
Forecasts and Valuation of 0%). This implies an FY17F PE of 11.7x, which is in line with
FY Dec (US$ m) 2015A 2016A 2017F 2018F ADRO’s five-year average P/E multiple.
Revenue 2,685 2,524 2,945 3,104
EBITDA 550 813 1,105 1,174
Pre-tax Profit 280 547 823 881 Key Risks to Our View:
Net Profit 153 335 430 459 2017 coal pricing. Our forecast is dependent on ADRO’s
Net Pft (Pre Ex.) 153 335 430 459 capability to secure favourable coal prices from buyers, which
Net Pft Gth (Pre-ex) (%) (14.2) 119.1 28.3 7.0
should be seen in the rest of the year.
EPS (Rp) 63.6 139 179 191
EPS Pre Ex. (Rp) 63.6 139 179 191
EPS Gth Pre Ex (%) (14) 119 28 7 At A Glance
Diluted EPS (Rp) 63.6 139 179 191 Issued Capital (m shrs) 31,986
Net DPS (Rp) 31.4 30.5 89.4 95.6 Mkt. Cap (Rpm/US$m) 46,859,434 / 3,529
BV Per Share (Rp) 1,184 1,318 1,408 1,503 Major Shareholders (%)
PE (X) 23.1 10.5 8.2 7.7 Adaro Strategic Investment 43.9
PE Pre Ex. (X) 23.1 10.5 8.2 7.7 Thohir Garibaldi 6.5
P/Cash Flow (X) 12.5 5.2 5.1 4.5
EV/EBITDA (X) 8.8 5.5 3.9 3.4 Soeryadjaya Edwin 4.3
Net Div Yield (%) 2.1 2.1 6.1 6.5 Free Float (%) 45.3
P/Book Value (X) 1.2 1.1 1.0 1.0 3m Avg. Daily Val (US$m) 4.5
Net Debt/Equity (X) 0.2 0.1 0.0 CASH ICB Industry : Basic Materials / Mining
ROAE (%) 5.4 11.1 13.1 13.1
Earnings Rev (%): 0 0 0
Consensus EPS (Rp): N/A 173 173
Other Broker Recs: B: 21 S: 3 H: 1
Source of all data on this page: Company, DBSVI, Bloomberg Finance
L.P
WHAT’S NEW
Earnings forecast: Maintaining our earnings forecast coal hauling technique that could be hampered by the rainy
season, which typically takes place in 1Q17.
We believe that we have already baked in a conservative coal
production volume assumption. Our FY17 assumptions include
On track to meet our forecast and management guidance. We
operational EBITDA forecast of Rp1.1tr and NPAT forecast of
expect higher coal production and sales volume moving
Rp430bn which are pretty much in line with management
forward, in the direction of management’s FY17 guidance of
guidance and 1Q17 financial performance.
around 53m tons. A y-o-y ASP recovery for coal will also be seen
for the rest of this year (given the higher benchmark coal price
Our ASP assumption of US$52 per ton is also in line with
trend in the last six months), which will have a positive impact
management’s latest YTD guidance for coal prices. We expect
on coal ASP for contracts this year. On the other hand, ADRO
ADRO to book relatively steady coal ASP moving ahead in view
will also implement a higher strip mining strategy, in response to
of its positive mix of coal contract prices in the medium to long
the better ASP outlook, resulting in a higher cash cost level vs.
term.
1Q17. Net-net, the company is on track to meet our forecast
and management’s guidance.
1Q17 performance: A good start to the year
Earnings largely in line with our and consensus’ forecasts.
ADRO’s earnings recovered y-o-y on higher ASP despite weaker
Revenue and profitability trend
coal production in 1Q17 due to the rainy season. Reported
900 35%
NPAT came in at US$97m (+63% y-o-y, -23% q-o-q), while core
800 30%
NPAT excluding non-operational items net of tax stood at 700 25%
US$132m. Its operating EBITDA of US$276m (+44% y-o-y, +3% 600 20%
q-o-q) met our forecast, as ADRO continued to emphasise 500 15%
profitability amid the rising coal ASP trend. Its strip ratio reached 400 10%
4.6x in 1Q17, still below its FY17 target of 4.85x, as ADRO 300 5%
maintained a relatively low strip ratio to cope with the seasonal 200 0%
100 ‐5%
operational trend in 1Q17.
0 ‐10%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
Revenue met our forecast; higher ASP offset seasonal low Revenue (US$mn) ‐ LHS GPM ‐ RHS NPATM ‐ RHS
12
5
10
4
What to look for : Stronger performance expected in the 8
3
rest of the year 6
2
4
Stronger performance outlook for the remaining quarters. We
2 1
expect ADRO’s strong earnings performance to continue for the
0 0
rest of the year in the absence of seasonality factors. Note that 2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
unlike Tambang Batubara Bukit Asam (PTBA) that uses the Coal production volume (mn tons) - LHS Strip ratio (X) - RHS
conveyor belt coal hauling method, ADRO uses trucking-based Source: Company , DBSVI
Earnings Drivers:
Flat production outlook. We assumed coal output growth
would be relative flat over FY16-18F, premised on ADRO’s
defensive strategy of profitability prioritisation over production
expansion. Tutupan and Paringin concessions will remain the
largest contributors (48m tons) at 96% of ADRO's coal
production.
Improved coal price outlook. Coal ASP will improve alongside ASP (US$/ton)
the better Newcastle coal benchmark price outlook. We expect
ASP to climb to US$52 per ton in FY17 before rising further to
US$54 per ton in FY18, in line with our higher coal benchmark
price forecast of US$65 per ton next year. A higher coal ASP will
allow ADRO to expand its profitability and deliver better
earnings growth.
Key Risks:
Coal price. Coal price is the key upside/downside risk for coal
miners, as they are price takers with minimal pricing power.
Despite the impact of higher or lower coal prices not being
fully reflected in ADRO’s quarterly earnings, the coal price
sentiment can affect ADRO’s stock price.
Execution risk. If ADRO fails to meet its targeted production Forward PE Band (x)
volume and cash cost per ton, ADRO could miss our earnings
estimate.
Company Background
ADRO is Indonesia's second largest coal producer. It sells 75%
of its production to the export market and the rest in the
domestic market. It has subsidiaries that operate in the mining
contracting, barging and ship-loading, and water-tolling
businesses.
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Sales volume (m tons) 56.2 51.4 52.6 53.5 54.0
ASP (US$/ton) 55.2 46.9 43.4 51.7 53.9
Cash cost/ ton (US$/ton) 40.7 39.2 35.8 33.6 34.0
EBITDA margin (%) 20.1 27.2 35.4 37.5 37.8
Interest expenses (US$mn) 190 48.9 40.9 33.7 38.9
Segmental Breakdown
FY Dec 2014A 2015A 2016A 2017F 2018F
Revenues (US$m)
Coal Mining 3,102 2,492 2,347 2,765 2,909
Mining Contracting 139 123 111 145 160
Others 84.2 70.4 66.0 35.0 35.0
Total 3,325 2,685 2,524 2,945 3,104
Growth
Revenue Gth (%) (19.8) 2.5 0.5 2.2 23.8
EBITDA Gth (%) (28.0) 62.7 7.3 10.2 18.1
Opg Profit Gth (%) (87.4) 854.2 1.8 22.2 40.9
Net Profit Gth (Pre-ex) (%) (144.2) (323.0) 4.5 38.8 45.5
Margins
Gross Margins (%) 18.6 26.3 25.2 27.0 29.5
Opg Profit Margins (%) 2.1 20.0 20.2 24.2 27.5
Net Profit Margins (%) (4.7) 10.2 10.6 14.4 16.9
Source: DBSVI
Analyst: William Simadiputra
WHAT’S NEW
We reiterate our forecast in the meantime. Despite the ASP vs. Newcastle benchmark price (US$ per ton)
stronger-than-expected performance, we maintain our overall 120 15%
operational and financial forecasts for 2017 and 2018. We 10%
believe ITMG will continue to deliver strong earnings 100
5%
performance for the remaining quarters in 2017 given the 0%
higher ASP trend and ITMG’s ability to maintain its low cost 80
-5%
structure. Another upside potential could emerge if ITMG is 60 -10%
able to ramp up its production capacity faster than the -15%
seasonally slow pace of 1Q. 40
-20%
-25%
20
High margin will sustain -30%
optimisation program, and better profitability that implies Source: Company, DBSVI
stronger cash flow generation prospects and higher dividends
whose sustainability should trounce our previous expectations. Strip ratio (x)
We raise our long-term coal production and cash margin 14 13.1
assumption to 29.5m tons and US$11.5 per ton, respectively, 12.2
12 11
for 2019 and beyond (from 26.0m tons and US$9 per ton 10
9.5
previously) – due to a slower production decline rate in the 10
8.7 8.6 8.6
9.4
8.1 8.3
next eight years and its efficiency-enhancing program. 8 7.1 7.4
6
Undemanding valuation, double-digit dividend yield. We
believe the share price correction in the last two weeks 4
0
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Earnings Drivers:
Earnings to grow by 29% in FY17, on higher coal ASP. We
forecast earnings will grow by 29% y-o-y to US$170m in FY17
before growing further by 21% y-o-y to US$206m in FY18. The
higher revenue and earnings in FY17 would be mainly driven by
the better coal ASP outlook, coupled with a higher cash margin
per ton, despite ITMG's flat production and sales volume
Avg selling price (US$/ton)
growth.
Higher cash cost on higher strip ratio. Cash cost will increase to
US$36.4 per ton in FY17 due to a better strip ratio outlook and Fuel cost (US$/liter)
higher fuel cost. We also assume fuel cost would increase to
US$0.7 per litre (+49% y-o-y) in FY17, on the back of a higher
crude oil price outlook vs. 2016. However, we see limited room
for mining contracting fees to be renegotiated lower given
ITMG’s flat volume growth.
Miners with higher strip ratios will benefit from lower fuel
prices. Miners, including ITMG, will be the largest beneficiary of
lower fuel cost given their high usage of machineries, in our
view. A low crude price environment has a positive impact on
ITMG’s profitability, as seen last year. EBITDA margin (%)
Key Risks:
Drop in coal prices. Coal miners are price-takers, with little
pricing power. Furthermore, the pricing outlook is more
challenging now, given the abundant supply and slower coal
demand growth due to environmental concerns.
Company Background
ITMG is one of the largest coal mining companies owned by
Banpu. The scope of the business includes coal mining
operation, processing and logistics. ITMG owns majority stakes
in seven subsidiaries and operates six mining concessions in
Kalimantan Island. PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Sales volume (m tons) 29.1 25.0 25.7 26.0 28.0
Avg selling price (US$/ton) 65.6 63.6 56.6 62.0 62.0
Cash cost (US$/ton) 43.6 38.2 35.6 36.4 36.2
Fuel cost (US$/liter) 1.00 0.70 0.50 0.70 0.70
EBITDA margin (%) 16.0 12.6 19.9 18.5 20.1
Growth
Revenue Gth (%) (13.5) (15.9) 25.4 17.2 (10.1)
EBITDA Gth (%) (38.7) (17.9) 84.4 75.5 (13.9)
Opg Profit Gth (%) (18.5) (47.8) 132.0 122.5 (13.9)
Net Profit Gth (Pre-ex) (%) (216.1) (41.6) 146.1 84.6 (6.5)
Margins
Gross Margins (%) 21.0 16.8 22.1 33.5 31.2
Opg Profit Margins (%) 11.6 7.2 13.3 25.3 24.2
Net Profit Margins (%) 7.0 4.8 9.5 14.9 15.5
Source: DBSVI
Analyst: William Simadiputra
Valuation:
Forecasts and Valuation We maintain our BUY rating with a higher target price of
FY Dec (Rp m) 2015A 2016A 2017F 2018F Rp16,000. Our DCF-based target price (WACC: 11.6%, LT
Revenue 13,734 14,059 16,875 18,742 growth: 0%) implies 11.4x FY17F PE.
EBITDA 2,699 2,948 4,298 4,694
Pre-tax Profit 2,664 2,734 4,315 4,791
Net Profit 2,036 2,006 3,235 3,592 Key Risks to Our View:
Net Pft (Pre Ex.) 2,036 2,006 3,235 3,592 Production volume expansion. If PTBA is able to boost its coal
Net Pft Gth (Pre-ex) (%) 1.0 (1.5) 61.2 11.0 production volume in line with management guidance, its top-
EPS (Rp) 884 871 1,404 1,559
line and earnings may beat our forecasts.
EPS Pre Ex. (Rp) 884 871 1,404 1,559
EPS Gth Pre Ex (%) 1 (1) 61 11
Diluted EPS (Rp) 884 871 1,404 1,559 Higher-than-expected cost. If PTBA fails to maintain its low
Net DPS (Rp) 398 361 632 701 cash cost trend, such as failing to clinch a favourable mining
BV Per Share (Rp) 3,982 4,523 5,295 6,152
PE (X) 14.5 14.8 9.2 8.2 contracting rate from third-party contractors, its earnings could
PE Pre Ex. (X) 14.5 14.8 9.2 8.2 miss our expectation.
P/Cash Flow (X) 10.9 20.3 7.3 8.3
EV/EBITDA (X) 10.1 9.7 6.4 5.7 At A Glance
Net Div Yield (%) 3.1 2.8 4.9 5.5 Issued Capital (m shrs) 2,304
P/Book Value (X) 3.2 2.8 2.4 2.1 Mkt. Cap (Rpbn/US$m) 29,608 / 2,226
Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders (%)
ROAE (%) 23.0 20.5 28.6 27.2 Republic of Indonesia (%) 65
Earnings Rev (%): 0 18 10 Free Float (%) 35
Consensus EPS (Rp): N/A 1,263 1,305 3m Avg. Daily Val (US$m) 2.9
Other Broker Recs: B: 22 S: 2 H: 2 ICB Industry : Basic Materials / Mining
Source of all data on this page: Company, DBSVI, Bloomberg Finance
L.P.
WHAT’S NEW
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2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
Share price (Rp) ‐LHS NPATM ‐ RHS ASP (Rp/ton) Cash cost ex. Royalty (Rp/ton)
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0% -
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17
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Earnings Drivers:
NPAT growth will turn positive on better ASP outlook. PTBA’s
earnings will grow at 54% CAGR over FY16-FY18, on earnings
recovery on the back of higher coal ASP outlook from both
domestic and export markets, while PTBA will maintain its strict
efficiency policies and production volume expansion of 12% y-
o-y in FY17 and FY18. A higher ASP will allow PTBA to
normalise its profitability in FY17 after hitting an all-time low in
FY16. Avg selling price(Ro000/ton)
Stable cash cost outlook given PTBA’s strict cost control and
large operational scale. PTBA’s total cash cost (including royalty
fees) is estimated to decrease by 8% y-o-y, thanks to lower
mining contracting fees and stable overall other operating cash Capex (Rpbn)
cost given that the strip ratio will remain stable at 4.5x.
Key Risks:
Slower-than-expected production expansion. A slower-than-
expected railway capacity expansion can lead to disappointing
production and sales volume. PTBA relies a lot on the
execution and scale of PT KAI’s railway capacity expansion ROE (%)
plan. The slower railway capacity expansion will translate into
lower sales volume and revenue growth trend vs. our forecast.
Company Background
PTBA is one of Indonesia's largest coal miners with 1.99bn
tons of coal reserves. Its main coal mining concession is located
in Tanjung Enim, South Sumatra. It is a state-owned company
with the government being its major shareholder.
PB Band (x)
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F
Sales Volume-mn tons 16.4 19.3 19.8 22.2 24.8
Avg selling 724 769 707 761 767
Cash cost/ton (Rp000/ton) 631 632 607 510 525
Total Capex (Rpbn) 328 1,742 931 1,484 1,120
Railway capacity (mn ton) 14.8 22.0 24.0 27.0 30.0
Growth
Revenue Gth (%) 9.7 (9.3) 2.2 22.3 13.2
EBITDA Gth (%) nm nm nm nm nm
Opg Profit Gth (%) (25.2) (1.0) (8.7) 187.1 2.2
Net Profit Gth (Pre-ex) (%) (37.3) 14.0 (10.3) 191.6 (12.2)
Margins
Gross Margins (%) 23.0 26.0 24.2 48.7 37.2
Opg Profit Margins (%) 13.0 14.2 12.7 29.8 26.9
Net Profit Margins (%) 9.4 11.8 10.4 24.7 19.2
Source: DBSVI
Analyst: William Simadiputra
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STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
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