Since our “Craving for Coal” report was published in Nov 2010 (let me know if you want a copy of the report), supply disruptions from unseasonably heavy rains in Australia have been substantial.
While most of the losses are focused on coking coal, where Queensland supplies over half the worlds’ HCC, the thermal coal market will also tighten as a result of the rains. Thesupply losses from Queensland will be complimented by other coals switching from the thermal to semi soft coking market.
Responding to supply disruptions, spot thermal coal prices are already above $130/t FOB Newcastle having been boosted by generally higher energy prices globally and the much colder than average winter in the northern hemisphere.
We are making a substantial upgrade, raising thermal coal price forecasts to US$125mt for this year and US$115 for 2012.
But rising coal prices is more than a Queensland event, in our view. The theme is structural. With the continued destruction of fiat monetary systems globally,commodity is back in vogue. Moreover, we forecast China’s import dependency for thermal coal to rise from 7% in 2010 to 13%, or 255 million tonnes, by 2015. Indian domestic coal output will also struggle to meet demand growth from the country’s power sector, driving imports to 200 million tonnes in 15CL. India also remains a cornerstone market for Indonesia.
In his latest report “The Big Dig” (attached), Nick Cashmore is re-iterating our thermal coal super-cycle call. In this environment, Indonesian thermal coal producers are firmly in the driving seat; we expect sector earnings will double this year.
And despite strong gains in recent months, the sector is still a long way from peakvaluations trading at 12x 2011 earnings and 10x 2012 profits. This compares with a five-year average of 13.3x forward earnings.
Sector returns will be concentrated. Indo’s nine largest thermal coal producers account for 85% of aggregate coal produced in Indonesia. Adaro (ADRO IJ), Bukit Asam (PTBA IJ), and Bumi Resources (BUMI IJ) have the best leverage into the cycle. OWT.
Earning wise, four Indo coal companies (PTBA, ADRO, BUMI, and ITMG) are forecasted to make US$2.6bn combined, or 3x and 2.1x 2008 and 2009 profits respectively.
We forecast 23% upside for our leaders.
Key points:
- Sector earnings to double this year from 2010. Aggregate 2011 earnings of PTBA, ADRO, BUMI and ITMG are 2x 2009 and 3x 2008
- Sector 2011 production at 163m tonnes up 13.5% from 2010
- While valuations still far from peak valuations trading at 12x 2011 P/E
- Top picks: PTBA, ADRO, BUMI
Changes in recommendation:
- BUMI: now a BUY with 4000 target (from outperform with 3100 target).
- ADRO: now a BUY with 3500 target (buy, 3100).
- PTBA: now a BUY with a 30,600 target (buy, 26,750).
- ITMG: now an OUTPERFORM with a 62,900 target (outperform, 60,000).
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