ITMG, Solid delivery, CLSA

ITM’s FY11 earnings were 11% ahead of our estimates and 14% of
consensus. ITM continues to provide the highest earnings visibility of the
Indonesian coal producers, completing a hedge program to lock in 2012
earnings. We adjust 12CL earnings by -5% to reflect the hedged coal and
oil volumes. A reserve upgrade combined with benchmark coal price
strength means the stock should trade at mid-cycle multiples and we
raise our target price to Rp,49,000/sh. Stock remains our top sector pick.

Solid FY11 result ahead of CL and consensus estimates
ITM’s FY11 result beat consensus by 14% and our numbers by 11%. The
company met its guidance of 25mt production and the result was ahead of
expectations from the top line down, with the US$97/t ASP 4% higher than
our 11CL estimate. Hedging is an important part ITM’s annual policy, but even
after stripping out the US$34m gain in FY11, the earnings result is 6% above.

Conference call provides further clarity
We hosted a conference call with ITM’s CFO and Head of Investor Relations.
ITM continues to provide good earnings visibility for 2012, having locked
away 60% of fuel needs at US$120/bbl Sing gasoil (US$0.98/L diesel) and
the 13% of coal sales which are not yet contracted at current market rates.
We adjust our assumptions accordingly to reflect the completed hedging
leading to a -4.7% reduction in 12CL earnings.

Reserve increase earlier than expected
At the end of 2011 ITM increased its reserves by 35% to 417mt. This is
tangible proof that concerns on ITM’s reserve life and lack of M&A action are
misplaced. The mine life continues to remain steady at 17 years despite a
12% production CAGR since listing in 2008. The reserve increase comes 12
months ahead of our estimate, and an independent technical expert review at
the end of 2012 provides for reserve upside still.

Increase target price to Rp49,000/sh. Still our top sector pick
The reserve increase and continued improvement in the benchmark coal price
mean the stock should now trade at mid-cycle valuations of 11x PE and 6x
EV/Ebitda. Our revised target price of Rp49,000/sh reflects this blended with
our life of mine NPV. The strong US$612m cash balance and the expected
US$200m being paid out during 1H12 underpins our 7% 12CL yield. Including
the dividend yield, the 12 month total return is 20% and we reiterate our BUY
call.

Download file : Indonesia ITMG Final 290212