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Selasa, 26 Juli 2011

Borneo Lumbung Energy & Metal: Buy – Initiation Coverage; Rp1,430; TP Rp1,800; BORN IJ A - Rare Breed - DBS

• Strong earnings ahead driven by volume growth
• Prime beneficiary of strong coking coal prices
• Initiate coverage with BUY rating and Rp1,800 TP

Highly leverage to coal prices. Borneo Lumbung (“BORN”) is a prime beneficiary of supply-demand imbalances for coking coal, which will ensure prices remain high. Coking coal producers also have better bargaining power and command higher margins than thermal coal due to the limited number of producers and supply of hard coking coal. Our sensitivity analysis shows each 1% rise in ASP and sales volume would raise our base net profit by 2.1% and 1.3%, respectively.

Strong earnings ahead. BORN offers attractive 2-year EPS CAGR of 54% over FY10-12F, driven by 47% annual production growth and higher ASP. It has the mining equipment and infrastructure needed to increase capacity to 5m tons this year, more than enough to support production growth until 2012. This year, we estimate EPS will grow by 81%, underpinned by 74% volume growth to 3.4m tons and 28% higher ASP to US$238/ton.

Attractive entry point, Rp1,800 TP. Our target price is pegged to blended 13x FY12 PE and 3x P/BV valuation. The share price weakness implies expectations of softer coking coal prices in 3Q have been priced in, and is a good opportunity to buy BORN in anticipation of a price recovery in 4Q on seasonally stronger demand. BORN is attractively priced at 10.1x FY12F PE (ex-cash 9.2x) against peers’ 10-12x and 2-year EPS CAGR of 54%. Key risks are: (1) volatile coal prices, (2) high execution risk, and (3) failure to solve logistics problem.

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