3Q12 earnings topped our estimate, upgrade 2012-2013 earnings HRUM posted 3Q12 earnings of USD36m which are 27% above our expectation, caused by higher than expected coal sales volumes (+5.3% QoQ and +38% YoY) and average selling price. Thus, we upgrade HRUM’s 2012 earnings by 2.7% to USD143m (-14% YoY) and 2013 earnings by 1% to USD170m (+22% YoY). It is worth noting that HRUM is the only company on our coverage which would book positive earnings growth in 2013 on the back of 12% YoY sales volumes growth and ASP growth of 3% YoY. We believe the increase in HRUM’s 2013 ASP would be helped by its short-term price contracts of around 3-6 months. We also believe that coal price shall slightly improve starting in 1Q13, backed by lower supply from Indonesian small miners, decreasing output from Australian producers which have relatively high cash-costs, and decreasing export volumes from the U.S. as we expect 2013 natural gas price to increase to USD4/mmbtu from 2012’s low of USD1.9/mmbtu (current: 3.6/mmbtu).
Acquisition of KUP; initial production in 2H14
By the end of 2012, HRUM is expected to complete the acquisition of 50.5% stake in PT Karya Usaha Pertiwi (KUP), a company which holds Mining Business License (Ijin Usaha Pertambangan – IUP) of a green-ﬁeld thermal coal concession area of approximately 2,700 hectares located in Kutai Kartanegara Regency, East Kalimantan, near HRUM’s Mahakam Sumber Jaya (MSJ) and Santan Batubara (SB) concessions. HRUM will commence the exploration of KUP in 1Q13.
However, the preliminary review indicates that KUP’s coal seams are part of the same geological synclinal structure of the SB’s Uskap Block, hence, is expected to have similar coal quality with SB’s coal (CV: 5,400-6,400kcal/kg adb). KUP will share some infrastructures with MSJ and is expected to commence initial coal production in 2H14, followed by full-year production volumes of around 1m tons starting in 2015.
Retain BUY with slightly higher TP of Rp7,600
We believe HRUM will be the only coal producer in our coverage to book positive earnings growth in 2013, helped by its sales volumes growth and short-term coal price contracts which would beneﬁ t HRUM when coal price start to improve in 1Q13. Additionally, acquisition of KUP would be positive for the Company’s long-term growth and we believe shall bring positive sentiment to its share price performance. We reiterate our BUY call on the counter with DCF-based (WACC:14.8%, terminal growth: 1.5%) target price of Rp7,600 and 38% potential upside.