Sunday, May 22, 2011

PT. Tambang Batubara Bukit Asam Tbk

by CLSA Securities

We are downgrading Bukit Asam to SELL. PTBA has one of Indonesia’s largest resource assets with 7.3bn tonnes, however extracting coal from pit to port has been a challenge. While not new, production constraints continue to weigh on immediate prospects for volume growth. Near term guidance looks optimistic and strategic railway projects remain idled. We have pushed back our volume assumptions, reducing earnings. We are below consensus and valuations look pricey to peers. SELL.

Lower near term guidance

PTBA controls one of the country’s largest coal assets with 7.3bn tonnes of resources and 2.0bn tonnes of reserves. Last year, the company produced 12.9m mt and 3.1mt in 1Q11. However, guidance of 13.6mt for 2011 looks ambitious now that additional rail wagons have been delayed until 3Q11, a six-month delay from original intentions. We have reduced our volume to 13.1mt this year and 15.5mt in 2012.

Double or nothing

Lifting existing capacity above 16mt requires double tracking parts of the existing railway network, a project undertaken by KAI, the state-owned railway operator. Although only approximately 80km in length this will still cost US$600m in capex and must commence by 1Q12 to be operational by 1H13. This will lift total existing capacity to almost 23mt when complete. Given the delay in infrastructure projects, we have concerns on the ability of KAI to deliver additional rail capacity on time and budget.

Greenfield projects still green

Further out, the company remains in talks with China Railway and Transpacific for a 307km rail network to Tarahan Port. This would add 25mt to capacity and a US$3.5bn O&M contract was signed in March 2010. However, no land acquisition has yet been undertaken and the earliest this will be operational is 2015. Other projects such as the 200MW mine mouth power plant, which will consume an additional 1.0mtpa will also not be running before 2014.

Non consensus call

Of the 26 analysts covering PTBA there are only two SELL recommendations. Our forecast is also 13% below consensus. Our revised fair value is based on the five-year average P/E of 12x. Although the company has tremendous long-term potential, execution has continued to be disappointing. We prefer instead BUMI or ADRO.

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