Wednesday, April 13, 2011

Harum Energy Tbk (HRUM)

by Kim Eng Securities

� We like Harum Energy and assign it a BUY recommendation with 27% upside, due to its strong volume growth in FY11‐12 and high exposure to the spot market.

� We expect earnings to grow at a CAGR of 75% over the next two years, given the sales volume growth and high sales volume. Moreover, capex will be minimal starting next year, which will allow the company to distribute dividends with a payout ratio of up to 35% in the upcoming years.

Our View

� We estimate production to grow at a robust CAGR of 37% over the next two years, with output ramping up from 7.4m tons in FY10 to 13.75m tons in 2012. Currently, the company has a total capacity of 15m tons in its two concessions, Mahakam Sumber Jaya (MSJ) and Santan Batubara. We expect the third concession, Tambang Batubara Harum (TBH), to produce 0.75m tons of coal next year. Capex will drop significantly to only US$5m per annum for maintenance starting 2012 onwards. This year, it will spend some US$30m to boost capacity to 20m tpa.

� With some 70% of the sales volume of the expected 10.5m tons still unpriced or linked to index, Harum is highly exposed to a bullish coal market. Our assumption for the ASP in FY11 is US$94/ton, which exceeds the FY10 ASP of US$75.7/ton by 24%. We estimate a moderate cash cost (ex royalties) increase of 12% to US$42.7/ton, largely due to a higher fuel price.

Action & Recommendation

� Post IPO, the company has a clean balance sheet. Our target price of Rp11,683, derived from DCF, is based on the mine‐life in Mahakam Sumber Jaya and a 50%‐stake in Santan Batubara, with WACC of 13%. Our target price implies valuation of 12.2x FY12 PER, providing upside potential of 20%. BUY.

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