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Sunday, June 12, 2011

TP reduced to Rp55,000, still a BUY - PT. Indo Tambangraya Megah Tbk

by Danareksa Securities

We take into account the lower-than-expected 1Q11 results, along with new cost assumptions, which come from adjusting our depreciation rate and cost savings from the Bontang Power Plant. As a result, our FY11-12F EPS estimates are adjusted down by 9.9-7.5%. In the short term, we believe ITMG can take advantage of high coal prices, although we remain cautious on the company’s long-term prospects given its limited reserves. Our blended TP is reduced to Rp55,000, implying FY11-12F P/E of 14.1-12.1x. BUY call maintained.

Weak 1Q11 results, but should improve

ITMG’s 1Q11 results were weak. Apart from seasonally weak 1Q11 production volume, net income only reached US$95.2mn (+41.8% yoy) or just 17.8% of our FY11F forecast. We believe this is due to: 1) cost pressures from higher oil prices and 2) ITMG drawing on its coal inventories, which were mined in 4Q11 when costs were still high. ITMG, however, scored a gain on derivative transactions of US$9.5mn in 1Q11 due to gains on gas oil fuel contracts.

Tweaking our cost assumptions

We raise our cash cost estimates for FY11-12F to 41.0-37.8/t. The adjustment mainly comes from revisiting our cost saving assumption for the Bontang Power Plant, for which we consider our previous fuel savings assumptions too aggressive. Although the 1Q11 cash cost was high at US$41.5/t (+23.7% yoy), we believe it has already peaked since the oil price is currently on the downtrend, as evidenced by the declining Pertamina diesel price.

Still room for higher ASP this year

We maintain our FY11-12F ASP assumption at US$91.7-85.0/t. As of May 9th 2011, only 62% of ITMG’s targeted volume coal sales had been priced, with the remaining 24% and 14% being index linked contracts and unpriced, respectively. ITMG’s already-priced contracts were agreed at an average of US$87-88/t, which implies a benchmark price of US$113-114/t, or still below our benchmark price assumption for this year of US$129.8/t, or the current spot market price of US$119.3/t, therefore leaving some upside for higher ASP in the following quarters

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