We like Borneo Lumbung Energi, the only premium hard coking coal producer listed in Indonesia. At target price of Rp2,021 and upside potential of 22%, it merits a BUY rating. The company is ramping up capacity to 5m tons by YE11 from 3.6m tons at YE10.
With coal output expected to grow at a robust CAGR of 54% in FY11‐12, and a low tax rate of 25% (vs. 45% for some of its peers), Borneo looks set to be a major beneficiary of the recent hike in hard coking coal price.
With a production capacity of 3.6m tons, which had been put in place at YE10, sales volume is likely to double in FY11 to 3.4m tons from 1.65m tons in FY10. Monthly production for the first two months, typically a low season, is already 300k tons, suggesting that the company is on‐track to reach our estimated production target of 3.4m tons for FY11.
We expect the lower strip ratio of 14.5x in 2011 (vs 15.5x in 2010) to ease pressure in terms of cash costs. Therefore, we estimate that the company’s cash costs would increase by only 6% y/y to US$74.2m per ton in 2011, compared to a 30%‐ increase in ASP to US$240 per ton.
As a holder of a 3rd generation Coal Contract of Work (CCOW) that allows for coal production until 2039, Borneo enjoys favourable terms including: normal corporate tax rate (25%), direct ownership equipment, and no divestment requirement.
Action & Recommendation
We derived our target price of Rp2,021 per share based on DCF with WACC of 13%. We estimate cash flow based on the mine life in Kohong concession. We have not factored in its second concession Telakon in our forecast. Our target price implies 15.0x FY12 PER, with upside potential of 22%. BUY.