Indika Energy, Craving Consolidation, CLSA

Energy investment house, Indika Energy, will finally achieve its long held
dream of consolidating a producing coal asset at the top line. The group is
wasting no time deploying cash raised from the 29% sell down of mining
contractor Petrosea buying an 85% stake in privately held Multi
Tambangjaya Utama at what we believe is fair value. The group continues
to look attractive on a sum-of-the-parts basis and downside share price
risk is looks limited at 7x PE. Retain BUY with target price Rp3,450.


First majority owned coal concession
The purchase of MTU allows Indika to fulfil its long held dream of
consolidating a producing coal asset at its top line, with existing coal assets
associate accounted due to 50% or less ownership. Based on operational data
from management, we estimate the asset can generate cash margins of
US$21/t based on our long run coal price of US$110/t in 2014. A purchase
price of US$155m represents 0.9x our NPV estimate for the asset.

Permit issues to overcome
The bid is still subject to due diligence and is expected to close in 2Q12. The
previous owner, privately held Asia Thai Mining, operated the site’s 63km haul
road without the requisite forestry borrow and use permit and was forced to
halt production during 4Q11 as a result. Besides ensuring no liability for this
incident, Indika is also independently verifying the 40.6mt reserves before
the transaction closes.

Deploying Petrosea proceeds
Indika raised US$116m from the sale of 29% of Petrosea last month, which
goes most of the way for funding the US$132m purchase price. We had
expected the proceeds to be utilised for repaying a debt facility used to buy
MBSS in 2011. With net gearing at 0.6x equity at end 11CL, refinancing this
facility and obtaining leasing facilities for Petrosea’s US$180m capex
requirement should be achievable.

Indika sum-of-the-parts valuation compelling
Indika has continued to look attractive on a sum-of-the parts basis since
underperforming the market in 2H11. We acknowledge concerns on a series
of “one off” earnings misses during the past few quarters but believe
downside risk is limited at the current trading price of 7x core forward PE.
Management is adamant there will be no one offs booked for the 4Q11 result.
We maintain our fair value at Rp3,450/sh and BUY rating.

Download file : Indonesia Indika Energy Final