HRUM:Convincing result - Mandiri

Target achievement post IPO should boost investor’s confidence. HRUM achieved its FY10 target with total production of 7.4Mt, +27.6% yoy, combining Mahakam Sumber Jaya (MSJ) and Santan Batubara (SB). With exploited area of only 3,000ha (6%) out of 47,196ha, we believe the upside potential for higher reserves is ample amid coal price hike. The fourth coal crusher in Separi port is expected to commence soon, which will increase its total capacity to 20Mt. And as of December 2010, HRUM has received the 8 new set tugboats and barges with the remaining 2 sets to be delivered in March 2011. HRUM’s expansion would enhance value creation towards its shareholders. Considering its clean balance sheet, HRUM is traded attractively at 11.4x adjusted PER11F. We reiterate our Buy rating with higher TP of Rp11,000 per share implying 15.3x adjusted PER11F.

Strong results. Despite slightly lower revenue in term of Rupiah (due to the Rupiah's appreciation), HRUM reported strong adjusted FY10 net profit of Rp943bn, 14.5% higher than its reported net profit of Rp824bn, which 10% and 2% above our and consensus forecasts respectively. Stronger earning was supported by stronger earnings from associates amounting to Rp131.9bn, with SB contributing Rp80.6bn. As result, net margin increased to 18.4% vs 16.7% in FY09. In 4Q10, total coal production increased significantly 37.5%qoq up to 2.2Mt mainly due to robust coal production from MSJ.

Better to maneuver. In light of rising coal prices globally, smaller volume base coal player like HRUM would be better to maneuver in spot market compared to bigger coal players, which would benefit the company this year. This is seen from its FY10 (ASP) which similar with ITMG at US$75.7/ton despite its average lower caloric value. HRUM has most of its coal is priced at spot price rather than being fixed for longer term due to its quarterly pricing strategy. We expect FY11F’s ASP might reach above US$90/ton.

Reiterate Buy, Higher TP. We upgraded our earnings forecast as we increased our FY11F benchmark coal price projection from US$105/ton to US$115/ton. HRUM plan to adjust its earnings reporting in 2012 to present its true earnings. Based on our forecast changes, our blended valuation resulted in higher TP at Rp 11,000 implying 15.3x adjusted PER11F. We reiterate our Buy rating.