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Friday, September 16, 2011

PT. Indo Tambangraya Megah Tbk - Currently Undervaluation

by Ciptadana

Reinitiating coverage with target price of Rp59,000 - We reinitiate ITMG with BUY recommendation and target price of Rp59,000. Our target price is derived from DCF calculation with 11.8% WACC and 1.5% terminal growth. From the current market price, the target price translates for 34% upside potential. The company’s price to earning ratio is tempting where 2012 PE is 8.7x, far lower than JCI 2012 PE of 12.7x. As earnings growth will be holding up we see no reason for ITMG’s current market undervaluation.

Benign weather, production target will be achieved - ITMG has experienced unfavorable weather condition in second half of 2011 (particularly at Indominco site), but weather condition has started to improve in third quarter. As weather is one and only obstacle that could hinder the company’s to achieve its production target, we believe ITMG will meet its 2011 production target with minimum coal production of 24.5 million tones.

Maintaining growth through Trubaindo and Bharinto - Going forward, Trubaindo and Bharinto will be ITMG’s growth spots as Indominco has started to reach production plateau.The management has hinted that Indominco will produce less than 16 million tones of coal for the coming years. For speeding up production and maintain the coal production growth , additional capacity from PAMA (the company’s main contractor) already arrived at Trubaindo and Bharinto’s crushing plant construction has already completed.

Stable coal price - Although oil price has stubbornly traded below US$90/barrel since early August (a significant decrease if one compares it with 52 week high of US$114/barel), Newcastle coal price is surprisingly stable and consistently traded above US$120/tonne since last week of August. This fact is contrary to what market participants had been worrying before that benchmark coal price will have a significant correction. We estimate that ITMG will realize average selling price of US$92/tonne, much higher than 2010 ASP of US$74.7/tonne

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