Indonesian Coal Sector Outlook, CLSA

Mean Reversion
Our Indonesian thermal coal universe is up 11% year to date as investors
have moved firmly back to risk on and have rerated cyclical equities.
Following recent share price strength, we replace PTBA with Harum as
our second choice behind defensively positioned ITM. Retain neutral
weighting as the sector remains the most exposed in Indonesia to
investor sentiment on global macro events.

Strong out of the blocks
 Our 6 Indonesian thermal coal producers are up an average 11% year to date
versus the JCI’s 2% appreciation
 The rally in Indonesian coal equities echoes regional moves as investors have
moved back to ‘risk on’, now ignoring the Euro-zone sovereign deleveraging.
 Thermal coal remains CLSA’s top defensive commodity regionally.
Raise Harum to Outperform, TP 9,400/sh
 Given the preference for beta, we expect Harum to perform strongly given its high
growth trajectory of 28% 3 year production CAGR vs our sector estimate of 9%.
 The East Kalimantan bridge collapse is not affecting the company’s shipments with
restricted barge movements allowed since late Dec 2011.
 We base our new target price on a 12x PE, 6.5x EV/Ebitda applied to 12CL/13CL
estimates blended with our life of mine NPV.
Retain PTBA at Outperform, TP 23,500/sh. Buy on weakness
 PTBA has increased 21% year to date on renewed optimism of infrastructure
improvements and a share buyback signalling better capital management.
 We visited the mine site and retain our operating assumptions (see separate note)
 Increase target price to Rp23,500/sh on 12x PE, 8x EV/Ebitda on 12CL/13CL
estimates blended with our NPV. We are BUYers into any weakness.
Retain neutral weighting with slight changes to the pecking order
 We retain ITM as our top pick given its cheaper valuation vs peers and 8% dividend
yield which provides a cushion should we re-enter a ‘risk off’ equity environment.
 Following a strong performance in the stock, we replace PTBA with Harum as our
second choice, noting both these companies offer high return on equity and strong
cashflow generation like ITM.
 We retain Adaro and Bumi as Underperforms as we await further detail on Adaro’s
South Sumatran plans and Bumi’s deleveraging takes longer than expected.

Download file : Indonesian Coal Sector Final