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Senin, 17 Januari 2011

Citigroup Indonesia Coal - Risks Are Not All One Way

 Ratings maintained; Adaro is our only Buy — We maintain Adaro (ADRO.JK; Rp2,625; 1M) as our top sector pick and only Buy as valuations remain attractive and at a substantial discount to its local and global peers. At 2011E EV/EBITDA of 6.1x and P/E of 11.8x, Adaro trades at a 22% and a 17% discount, respectively, to the global coal stocks’ average. We maintain our Hold ratings on ITMG (ITMG.JK;
Rp53,350; 2L) and Bumi (BUMI.JK; Rp3,175; 2H) and a Sell rating on PTBA (PTBA.JK; Rp23,350; 3L) on valuation concerns.

 Current share prices reflect average coal prices of US$120/t in 2011 — Assuming that the market assigns valuation of 13.1x 2011 P/E (the sector’s mean 1-year forward P/E since 2007), we estimate that the current share prices reflect average coal prices of US$120/t for the entirety of 2011. Hence, unless one believes the spot prices, and most important, the annual Japanese reference price will stay at the elevated current levels of more than US$130/t for the remainder of 2011, we believe the upside potential is rather limited.

 Indonesia’s coal stocks now at premium to China’s thermal coal names — The huge 25-40% outperformance of Indonesian coal stocks vs. their Chinese thermal peers in the past three months put the former at a 5% premium on 12-month forward EV/EBITDA vs a substantial discount in most of the past four years (average discount of 30% since 2007, the start of coal price upcycle).

 Sustainability of elevated spot price is uncertain; futures market in backwardation — As the spot coal market is illiquid, the perfect storm of Australian flood, cold snap in Europe and North Asia, and Indonesia’s thin inventory has exacerbated the panic buying (spot price surged 22% in the past month). However, the futures market is now in backwardation (1-year futures price lower than spot prices) after being in huge contango for much of 2010, suggesting the uncertain sustainability of the current high spot prices.

 Supply disruptions for thermal coal are less adverse than for coking coal — Queensland’s significance to the global seaborne thermal coal market is substantially lower than to coking coal. Citi’s Commodities team estimates up to 2Mt of thermal coal has been lost due to the flood. This represents approximately 3.5% of Queensland’s exports or 0.5% of the global seaborne market.

 Risks — Upside risk to our cautious view on the sector is largely on coal prices. If
coal prices continue to stay well above our current assumption of US$110/t throughout 2011, this would justify the sector’s further major re-rating.

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