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Wednesday, November 16, 2011

Indo Tambangraya Megah Tbk - ITMG

by Kresna Securities : ITMG

We maintain HOLD rating on ITMG and introduce our new TP of Rp48,400 as we roll over our base year to 2012 and set P/E target at 10.9x. The 9M11 results, top to bottom, outperformed our expectations, arriving 77.7% - 81.4% of our FY11E. Production achievement was on track, arriving at 75.7% of our FY11E of 23.5mt, while ASP was 4.7% higher than our FY11E assumption of US$90.3/mt. Costs remain a concern as 3Q11 cast cost was still higher than our FY11E assumption of US$44.5/mt. Hence, we make several adjustments in our model, resulting to a 7.3% upward revision in FY11E net income to US$476.2m. We maintain our FY12 net income forecast at US$555.8m, assuming production volume of 26.0mt, ASP of US$92.4/mt and cash cost of US$44.0/mt.

Key Catalysts

Production grew 17.2% QoQ to 6.8mt. Company managed to record strong production volume in 3Q11, mainly supported by a dry weather and additional capacity from mining contractors, particularly at Indominco and Trubaindo mines.

Strong ASP realization. 3Q11 average selling price (ASP) remained robust, growing by 1.1% QoQ to US$98.4/ton, yielding 9M11 figure to hit an average of US$94.6/ton. For the remaining quarter, as prices for all volume to be sold in 2011 have been sealed, ASP is expected to remain high in 4Q11 with FY11E ASP to approximately reach US$97/ton.

Cash cost remained high. Despite declining oil price in the spot market and drier condition in the sites, ITMG’s cash costs still stood at a high US$49.2/ton in 3Q11 (vs US$50.7/ton in 2Q11 and 41.5/ton in 1Q11). This is because the company unfortunately hedged its oil purchase while strip ratio in Trubaindo experienced increase (11.9x in 2Q11 to 14.1x in 3Q11).

What’s 2012 target? Company will allocate around US$223m capex (fully financed from internal cash) to develop infrastructures and facilities, primarily in Trubaindo (hauling roads) and Indominco (washing plant). With these, ITMG aims to increase production by 14.9% YoY to 27mt in 2012

Earnings Outlook

Outperforming 9M11 results. The 9M11 results, top to bottom, outperformed our expectations, arriving 77.7% - 81.4% of our FY11E. Production achievement was on track, arriving at 75.7% of our FY11E of 23.5mt, while ASP was 4.7% higher than our FY11E assumption of US$90.3/mt.

Maintain production assumption. We continue to maintain our production assumption of 23.5mt in FY11E. We anticipate that, the rainy seasons which have started in mid-October, will delay the commencing production at Tandung Mayang and Bharinto sites, from previously planned in 4Q11 to 1Q12.

ASP: Upgrade the FY11E, but maintain for FY12F. Due to better-than-expected realization in 9M11, we decide to upgrade our FY11E ASP by 6.5% to US$96.2/ton.

For 2012, we prefer to conservatively maintain our assumption at US$92.4/ton given recent weakness in the thermal coal price benchmark (this will apply to the new contract, starting by 1Q12).

Increases cash cost assumption. We believe cash cost in 4Q11 will remain high, attributed to the oil hedging activity and rising strip ratio in Trubaindo mine. As such, we decide to slightly increase our FY11E cash cost assumption by 5.4% to US$46.9/ton. Meanwhile, we believe FY12F cash cost will decrease along with the increasing contribution from East Block of Indominco (low strip ratio) and subsiding contribution from West Block of Indominco (high strip ratio) at the same time.

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