UBS INDO Bukit Asam (Sell, PT Rp20,000, 13% downside)

Bukit Asam’s (PTBA) shares grew 33% from January 2010, which is an overall underperformance versus the sector. We maintained a Buy on the company throughout the year, as our investment case was primarily based on the company’s ability to extract higher coal prices and further develop its muchawaited infrastructure projects.

However, we were disappointed to learn that management is expecting an ASP in the mid-60s per tonne for 2010, which is approximately 15% below the sector’s US$70-75/t//t. Furthermore, the delay in PLN’s construction of the 2,400MW Bangko Tengah power plant from 2014 to post-2017 is likewise disappointing. The plant was scheduled to off-take 10-12mt of thermal coal from PTBA, equivalent to 20% of sales volume.
PTBA has rallied close to our price target and we consequently downgrade the rating from Buy to Sell, while revising our earnings estimates for 2010-12.

􀁑 Price revision. We revise our 2010-12 ASP assumption from US$74/t, US$88/t and US$80/t to US$67/t, US$85/t and US$72/t, in line with continuous disappointing domestic selling prices. We note that domestic prices appear to have stayed approximately 15% below export prices in 2010, which reduces PTBA’s earnings leverage from coal price momentum versus the sector. To date, 75% of 2011 volumes are still un-priced.

􀁑 Production weakness. The excess rain in H210 is likely to have pressured production throughout 2010. In our experience, production pressure in one year negatively affects the subsequent years due to overall infrastructure capacity constraints, and thus we downgrade production from 15mt to 14mt in 2011. In the longer term, we postpone the 10-12mt off-take from the Bangko Tengah power plant five years to 2018.

􀁑 Cost inflation. In addition to overall fuel cost pressure, costs are likely to increase further as a result of higher railway tariffs, which are likely to increase 6-9% in the near term. We raise our 2010-12 cash cost estimate from US$33/t, US$35/t and US$36/t to US$43/t, US$45/t and US$46/t respectively, excluding royalties. PBTA’s production costs are highly exposed to fuel price volatility due to its railway utilisation.
Our earnings estimate is 17% below and 2% above consensus forecast for 2010 and 2011, respectively.
With a 2011 earnings sensitivity of 2.7% for a 1% change in coal prices, PTBA is in the middle of the Indonesian sector range.

We lower our price target from Rp25,500 to Rp20,000 per share, which incorporates our earnings revision, a lower risk-free rate from 10% to 7.6% and a slightly higher beta from 1.2x to 1.4x, which reduces the WACC from 11.3% to 9.6%. We employ a 12-month target PE valuation multiple of 13.7x, which is in the upper band of the historical trading range. For a check on our PE valuation, we run a life-of-mine DCF valuation based on the UBS VCAM model, which renders a valuation of Rp18,000 per share, slightly below our price target.