INDY consolidated revenue is projected to grow 6.1% p.a.
Supported by strong backlog contract from Tripatra and Petrosea, we forecast that INDY’s consolidated revenue will grow by CAGR of 6.1% p.a. from Rp 4.96 trillion in FY10 to become Rp 5.92 trillion in FY14. The main contributor is still coming from energy services division, which are represented by Tripatra and Petrosea. Meanwhile, sales of coal is projected to be a pillar of growth (20% p.a. CAGR) for INDY consolidated revenue during the same period, which is triggered by projected strong coal price increase.
MBSS acquisition plan: to be a leading integrated energy player
From our discussion with the management, we learned that INDY signs option to acquire a majority 51% ownership of PT Mitra Bahtera SegaraSejati (MBSS), an integrated coal transport and logistics services. The company believes that this acquisition will strengthen the transshipment of coal due to the limited capacity from Cotrans and Sea Bridge, in our view. On the other hand, the acquisition of MBSS will contribute additional revenue stream and enhance the company’s profitability in the future. Currently, we have not incorporated MBBS’s into our financial model and valuation assessment due to the transaction is not yet completed. As a background, INDY’s management has indicated that MBSS’s 9M10 revenues reached Rp 553 billion, gross profit at Rp 224 billion, operating profit at Rp 178 billion, EBITDA at Rp 256 billion and net profit at Rp 164 billion.
Kideco’s bottom line: the pillar of INDYs’ net profit
Historically, INDY’s bottom line looked very superior compared to its operational margin which was underpinned by strong operational performance from its coal mining subsidiary, Kideco. Going forward, we believe that the coal outlook will remain positive on the back of medium term rise in coal prices and long-term growing demands, particularly the needs of coal supply for fired power plant and nuclear power. For Kideco, we assume that the company’s coal production is projected to grow by CAGR of 7.4% p.a. for FY11-FY14 period reaching to 38.8 million tones in 2014, while ASP is estimated to rise by CAGR of 7.7% p.a. which resulted in strong bottom line performance. With 46% stake in Kideco, INDY will enjoy US$ 175 million – US$ 216 million equity net income from Kideco during the same period. As the result, the company’s net margin will be well-maintained above 29% for FY11 – FY14.
Initiate INDY coverage with BUY rating, fair value Rp 6,200
INDY’s share price has rallied by 39% in 4Q10 and has reached closing high of Rp5,300 per share in 4 January 2011. However, it has significant correction (-9%) from its highest price due to the overall taking profit in IDX. We view that this is a good entry for the investor to collect this share since INDY still offers attractive valuation, underpinned by 1) coal price rising; 2) strong revenue stream from Tripatra and Petrosea; 3) superior net profit outlook, contributed by Kideco’s performance and additional income from the operation of Cirebon Electric Power (CEP) in 2012; 4) MBSS acquisition’s plan will enhance INDY financial performance; and 5) more liquidity post placement of shareholders shares in November 2010. Hence, we initiate INDY coverage with BUY recommendation and a fair value at Rp 6,200 per share, which is derived from SOTP methodology. Our fair value still offer 28% upside from yesterday closing price.
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