ITMG FY10 a big disappointment; maintain Buy but lower PO - BoA Merrill Lynch

FY10 net profit significantly below estimates
FY10 NP at US$204mn was down 39% YoY, 25%/33% below our/consensus estimate. NP for 4Q, at US$18mn, fell 74% YoY and 65% QoQ. FY10 EBIT at US$363mn dropped 17% YoY, 10%/12% below our/consensus estimate. However, FY10 revenue was in line at US$1.67bn, up 11% YoY. Key factors
behind the earnings miss were (1) a US$54mn loss from derivative transactions resulting from a marked-to-market loss from coal swaps (ITMG has an agreement to sell forward up to 10% of its sales volume) and (2) higher opex (demurrage fees and Jorong standby costs). We believe the above factors are one-offs.

Costs trending up, but still within our expectations
Unit production costs for 2010 rose 15% YoY to US$38.7/t, 3% ahead of our FY estimate of US$37.5/t. Costs for 4Q were US$48/t, 23% higher than 3Q and 36% over the 9M average. The rise was driven by (1) a higher fuel price and (2) increased S/R at Indominco (ITMG moved its mining pit due to bad weather). S/R ended up rising 50% in 4Q to 17.9. There were no surprises for volume and ASP.

2011 cost seen higher, cut earnings & PO 6% to Rp52,300
We cut our earnings estimates 16% for 2011 and 2% for 2012 on higher costs and lower ASP. Cost pressure will come from (1) higher S/R on pre-stripping work in Tandung Mayang, which could see S/R jumping to 28 before the mine S/R of 15 comes into effect; (2) increased fuel costs; and (3) higher contractor costs. We also pare our ASP from US$92 to US$89 (company guidance is US$85-90/t for the full year). To date, 40% of ITMG’s volume has been priced at US$82/83.

2-3Q best time to re-enter Indo coal
ITMG is one of the first Indo coal firms to release results, but we expect the other names to follow the same fate (see our sector note dated 7 February 2011). We think the best time to re-enter Indo coal stocks would be 2-3Q after Indonesia’s inflation and monetary tightening measures peak out, effects from bad weather on coal prices normalize, and earnings are adjusted down. With ITMG share price correcting 20% in less than two months, we see less downside risk to ITMG from current level. We keep our Buy rating.