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Tuesday, July 26, 2011

Indika Energy.Tbk - Growth and earnings quality under-appreciated; we initiate at OUTPERFORM

by CIMB Securities

Indika Energy (INDY) offers an attractive exposure to the Indonesian coal sector through its integrated energy services operations and 46% stake in the country’s third-largest coal producer Kideco. We expect a robust 45.6% CAGR for 2011-2013 net profit with improved earnings quality following the acquisition of coal logistics company MBSS. INDY’s current valuation of 11.0x forward P/E – the cheapest among coal players (14.9% discount to industry average) – suggests that its strong growth and better earnings quality are under-appreciated. Our SOP-based price target of Rp4,725 (upside of 21.9%) implies a fair 13.3x forward P/E. A short-term catalyst could also emerge from the expected relisting of Petrosea.

Increasing integration and coal exposure to drive value creation. We expect Petrosea and MBSS to drive INDY’s revenue growth (24.2% three-yr CAGR) and help improve EBITDA margins to 14-22%. Future growth enhancements should come from increasing integration between INDY’s key businesses, which in turn will also raise the contribution from coal-related businesses to 69-74% of the group’s 2011-12 revenues.

Kideco remains key growth driver. Kideco has proven itself to be one of the most reliable producers in Indonesia, with an above-peer production CAGR of 13% over the past 10 years. We expect its 8% CAGR in production over the next three years and exposure to the coal price upcycle to contribute strongly to INDY’s bottom line.

Execution risk. The key risk to our forecasts is problems in integrating the newlyacquired businesses and coal mines.

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