by Credit Suisse
Downgrade to NEUTRAL. We downgrade BORN from Outperform to NEUTRAL and revise down our earnings forecast by 18% for 2011E and 6% for 2012E on weak sales. We lower our sales volume from 3.2 mn tonnes to 2.8 mn tonnes, as we now expect continuous delays in shipments due to: (1) pricing negotiation and (2) more challenging logistics to deliver products during the dry season in 3Q11E. We revise down the short-term price from US$313/t to US$291/t for 2011E.
Short-term downside risks to consensus. We expect 1H11E sales volume to come below expectations, while production remains on target. Given uncertainties in pricing and minimal contracted volume, continuous pricing negotiation (as BORN is in the process of establishing its brand) may cause delayed sales. In addition, as we enter into the drought season in 3Q, BORN will be able to ship less, given the occasional low water level on the upper north part of the river.
Expect volume to remain weak in 2Q and 3Q. We expect 2Q and 3Q sales volumes to remain below market expectation of 3.0–3.5 mn t. Given that we expect little upside on price in 3Q–4Q, we believe there will be little catalysts to boost the share price.
Valuation. We decrease our target price from Rp1,900/share to Rp1,600/share based on 16x 2011E P/E, and revise our rating from Outperform to NEUTRAL. Given potential temporary weakness in the share price from volume disappointment, while we do not expect significant price support, we prefer thermal coal play at this time. We expect thermal coal price to strengthen in 4Q11, as well as improved weather to boost thermal coal players’ share prices. We recommend investors to switch to thermal.