Tuesday, July 12, 2011

Tambang Batubara Bukit Asam Tbk

by UBS Securities

We revise Bukit Asam’s earnings from -17% to 36% for 2011-13E, and upgrade our rating from Sell to Buy following the stock’s 7% correction from its May peak this year. Our price target is based on a 12-month PE multiple of 14.3x.

Average selling price increase. We raise our ASP assumption by 27-31% in 2012-13 in line with our higher benchmark price forecast. Bukit Asam has priced 80% of its 2011 volume YTD, while the remainder is based on unpriced index-linked contracts and spot sales.

Volume adjustment. We make a downward adjustment to Bukit Asam’s production in 2011-13, which we attribute to insufficient investment in the mines and underlying infrastructure. The company produced 3mt in Q111 (20% of our new estimate), while we believe Q2 production will be similar. Our new production estimate is down 7-13% to 14.9mt, 17mt and 19.5mt in 2011-13, respectively. We expect primary production growth over the next three years to be driven by additional railway wagons and engines that management expects to add to the existing railway line in H211.

Cost inflation. We make an upward revision to costs following overall inflation in fuel, labour and heavy equipment.

We base our price target on a 12-month target PE valuation of 14.3x, which incorporates a 7.6% risk-free rate, 1.2x beta and a 13.5% cost of equity. Our previous 12.9x target PE was based on a 7.6% risk-free rate, 1.3x beta and 14.1% cost of equity Bukit Asam is currently trading in the mid-to-upper range of its historical PE and EV/EBITDA band.

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