Indo Tambangraya: Buy; Rp43,850; TP Rp59,000 prev Rp62,350; ITMG IJ Buying opportunity - DBS Vickers

• Banpu is unlikely to sell down ITM stake for now
• Accumulate for upside to earnings on higher ASP resulting from rising coal prices
• Maintain Buy for strong growth and attractive valuation; TP cut by 5% to reflect lower earnings forecast

Attractive entry point. ITM’s share price fell 6% over the last two weeks despite rising coal price. We understand this was mainly due to rumours that Banpu planned to sell more ITM shares at a discount. Our channel checks indicate Banpu has no such plans since it has managed to refinance the debt taken to fund the CEY acquisition. The price weakness presents an attractive entry point to increase exposure to ITMG in anticipation of strong earnings growth this year underpinned by higher volumes and contract prices.

Potential upside from higher coal prices. We estimate FY11F volume at 26m tons and ASP at US$85/ton, against 23m tons and US$73 in FY10. ITM has contracted 89% of FY11F volume with 40% priced at above US$82. We expect more upside to earnings, the catalyst being higher-than-expected contract prices with the prevailing high oil prices. ITM may also declare higher dividends if the acquisition is delayed.

Attractive valuation. We cut FY11-12F earnings by 2% after imputing higher fuel costs and lower volume from Jorong. Our target price is also cut to Rp59,000 (from Rp62,500) based on blended valuation of 17x FY11F PE and 6x PBV to reflect lower earnings forecast. The stock is attractive at 10x FY11F PE versus 12-13x for Indonesian peers