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Wednesday, December 14, 2011

Bukit Asam Tbk - Defensive Coal Stock

by Trimegah Securities

Advantages from Growing Domestic Demand

Despite of any concern on slowing global coal demand due to the macro headwinds, Indonesia’s coal demand is expected to remain strong, thanks to the completion of PLN’s 10,000 MW fast track program. Upon the completion, PLN coal demand will increase by 133.6% from 40.8mn tons in 2010 to become 95.3mn tons in 2014. Both PLN and PTBA have entered into an agreement to increase the supply volume up to 14.0mn tons by 2014, which indirectly places PTBA on responsibility for generating 14.7% of total national electricity in 2014.

Progress of the Railway Project Has Been Seen

Although it was delayed, PTKA has managed to deliver 12 new locomotives and 250 new wagons at the end of 3Q11. The delivery postponement has caused a weak production growth in 9M11 (+8% YoY), but we expect it to reverse in 4Q11 onward along with the new railway equipments and the completion of its double-track expansion. Looking at the historical disappointing zero progress, we see a significant milestone has been done to date. The government has finally realized the lack of infrastructures that we have and is committed to accelerate the development through economic master plan. BATR Project is listed as one of the government’s MP3EI projects

Spared from Any Policy Noises

We’ve recently heard many potential regulations to be implemented in order to conserve the national coal resources such as an export ban on low rank coal, limitation on foreign ownership, and export taxes. Compared to other coal miners, we believe that PTBA will get a less affect if such regulations are implemented.

Around 60% of the company’s sales are designated to the domestic market (68% in 9M11) and most of the sales are coming from its low to mid rank coal products, leaving the high rank coal (BA -70) for the overseas market.

Lower TP of Rp22,200, Maintain BUY

We maintain our BUY call for the counter (despite with the lower target price) on the back of its defensive characteristics. We also positively highlighted the progress on the company’s existing railway expansion. We adjust our 2012 and 2013 coal production volume to reflect the potential impact of delays in wagons and locomotives delivery and lower IPC output. We also incorporated our lower 2012 coal price assumption. As a result, FY12-FY13 EPS cut by 12.0% and 6.2%, respectively. Our TP implies 12.2x 2012est PE

Key Risks: Execution risk is become company’s main risk so far, prolonged delay in railway development will put PTBA’s organic growth on jeopardy, legal issue with regards to its concession in Lahat, and the fluctuation of global coal prices.

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