Morgan Stanley : PT Indo Tambangraya Megah Tbk (ITMG.JK): Reserve Issues Getting Addressed

Investment conclusion: ITMG remains our top pick amongst Indo coal producers. We have raised our earnings forecasts by 19-14% for the next two years on the back of higher ASPs (US$91 in 2011, and US$70 in 2012). This is due mainly to the expected increase in the regional seaborne thermal coal price in 2011 from US$105 to US$130, and in 2012 from US$110 to US$125. In addition, we expect ITMG to prove up to 120-180mn tons of new reserves through new mine planning applying an updated thermal coal price methodology. Accordingly, we remain Overweight and increase ITMG's price target to Rp64,000 to reflect the earnings upgrades.

Higher ASP and sufficient reserves: Based on increasing regional thermal coal prices, we expect ITMG to achieve an ASP of US$91, a 21% increase from 2010. The issue of its comparatively small reserves will be partially solved through the process of new mine planning using a updated thermal coal price, which will give ITMG an extra 4-6 years of mine life expectancy, more than enough time to utilize its US$350mn of cash balance to execute a long-term M&A strategy, in our view.

Valuation undemanding: ITMG is currently trading at around 11x 2011 P/E vs. the regional average of 14x. Despite the recent run-up in stock price, valuation remains undemanding. We encourage investors to stay invested for further appreciation and the generous dividend yield. For its efficient operations, conservative management, and expected ASP increase, we reiterate our Overweight rating on ITMG and highlight the stock as our preferred pick amongst Indo coal producers.