South East Asia Coal Sector - Focusing on company specific momentum - Credit Suisse

● With CS’s view that coal prices will be capped in a tight range this year, we continue to believe coal stock share performance will be company specific rather than sector specific. We focus our analysis on: 1) cost inflation mainly due to rising oil prices, 2) ASP momentum and 3) share price valuation.
● We prefer companies with strong earnings momentum or positive company-specific catalysts (Figure 1). We expect strong momentum for ITMG and PTBA and potential disappointment at ADRO on costs and at BORN on volume shortfall.
● For positive company-specific catalysts, we like INDY (listing of Petrosea by June 2011 to unlock value) and Straits Asia Resources (the granting of forestry permit at the Northern Lease to reduce earnings risks and allow stronger volumes growth in 2011 and beyond).
● Our target price is set at 16x 2011E P/E for all coal peers, in line with the JCI target index multiple. On a valuation basis, ADRO looks the most expensive while INDY appears the cheapest stock.