Buy idea – Berau Coal (BRAU) - JP Morgan

Stevanus Juanda (analyst) just did a round of earnings revision for Indo coal stocks based on higher thermal coal price for FY11 (US$120/ton to US$124) and FY12 (US$120 to US$125). Biggest change is seen at Berau Coal, with FY11 net income being revised up by 23% and FY12 by 70% (Steve is one out of two analysts with active coverage on BRAU). The forecast implies an outlier FY12 P/E ratio of just 6.8x for Berau Coal, suggesting the name as potentially the most attractively valued stock within Indo coal space. Steve values BRAU at Rp693/share based on NPV.
https://mm.jpmorgan.com/PubServlet?action=open&doc=GPS-597965-0.pdf

Manwhile, there is an outstanding tender offer for the stock at Rp540/share, for period 11 May to 3 June 2011, with payment date on 15 June 2011. The official tender document was posted on the local press on 11 May. Since then, the stock has never fallen below Rp540 on the bid side, suggesting tender acceptance rate could be low (or zero) coming from the 9.743% holder of the public float. With this in mind, the stock may continue to trade with 9.743% free float post the tender period. The founding shareholders intend to keep BRAU a listed company, no matter what happens to the tender’s acceptance rate.

Risk-reward profile for the stock looks good in my opinion, with most of the public float holders don’t seem willing to tender the shares at Rp540, vs. Rp540 last closing price. Within Indo coal universe, BRAU offers the most leverage to international coal price (yes, even more than Bumi!), with ASP-to-EPS sensitivity of 10:31 (for every 10% increase in ASP assumption, EPS will go up by 31%).