Indonesian Coal, Mixed FY11, CLSA

Indonesian thermal coal producers lived up to their production promises in FY11, but reported a mixed set of results. Standouts were Adaro and ITM which reported above ours and consensus expectations on strong ASP and cost control. Oil prices present the biggest risk to earnings in 12CL having averaged US$117/t during 1Q11. We factor in increased fuel costs into our numbers. Top picks remain ITM for defensive earnings and yield and Harum for highest production growth under our coverage.


FY11 results mixed – ITM and Adaro the key standouts
 ITM and Adaro above consensus on strong pricing
 Key misses against our estimates were Harum Energy on higher costs (despite strong yoy earnings and production growth) 10% below and Bumi Resources on higher financing charges (52% below)
 Production guidance was met across the board as weather remained favourable. We are nearing the end of the wet season which by all accounts has been normal.

Oil fired up
 Year to date oil has averaged US$117/bbl, and has moved against the coal price
 Oil represents 20% to 40% of the cost base of producers under our coverage
 The degree of hedging varies. ITM and Adaro most active here which improves earnings visibility.
 We adjust earnings across our coverage to reflect 1Q12 mark to market oil and CLSA house oil forecast US$108/bbl.

Benchmark coal price action could lift multiples
 The seaborne thermal coal price has decreased during 1Q12 and is now below the China import parity price (adjusting for tax, freight and energy)
 The Japanese Fiscal year contract has been reportedly been settled at US$115/t by Xstrata slightly below our estimate but broadly in line with consensus.
 We expect PE and EV/Ebitda multiples for the Indonesian thermal coal plays to stay inexpensive whilst the benchmark price trades sideways

Top picks remain ITM and Harum
 ITM remains our top pick for its defensive earnings and yield. The company announced a final FY11 dividend of Rp2,506/sh and above our estimate. The stock offers 9% dividend yield during 12CL.
 Harum offers the highest sector production growth but is also most leveraged to oil.

Download file : Indonesia Coal Final