We upgrade our recommendation to BUY as we raise our target price to Rp26,974, following the better‐than‐expected contract price (Rp815k/ton) with Suralaya power plant, its single biggest customer. On the cost side, we expect a y/y increase of 6%, below the industry average.
The new contract price of Rp815k/t for 2011 delivery, a y/y increase of 19%, exceeds our initial estimate of Rp750k/ton by 9%. The contract price for 5,000 kcal/kg GAR coal (CIF), equivalent to US$91.6/ton, is higher than our assumption of US$84/ton for exports. Another contract for 1m tons to Tarahan power plant at Rp575k/ton (~US$64.6/ton) has also surpassed our expectation.
Our sales production estimate for FY11 is 15.75m tons, lower than the management’s bullish expectation of 16.8m tons by 9%.
With most of the mining work carried out in‐house, involving a bucket wheel excavator that is generated by electricity, the company should not be overly affected by a higher fuel price. Therefore, we estimate a cash cost increase of only 6% y/y (vs. 10% for the sector) to US$36.9/ton. We expect its stripping ratio to stabilise at 3.5x in 2011, which should help to keep cash cost production low.
We like Bukit Asam for its clean balance sheet and high dividend payout ratio. Its ROE of c.38% for FY11‐12 is superior compared to the industry average of c.31%.
Action and recommendation
We upgrade our target price by 28% to Rp26,974 and recommend BUY. Currently the stock is trading at 14.2x‐11.0x FY11‐12 PER. Our target price translates into 13.5x FY12 PER and offers upside potential of 23%.