Bukit Asam (Buy, PT Rp25,000, 16% upside) - UBS

We revise Bukit Asam’s earnings from -17% to 36% for 2011-13E, and upgrade our rating from Sell to Buy following the stock’s 7% correction from its May peak this year. Our price target is based on a 12-month PE multiple of 14.3x.
􀁑 Average selling price increase. We raise our ASP assumption by 27-31% in 2012-13 in line with our higher benchmark price forecast. Bukit Asam has priced 80% of its 2011 volume YTD, while the remainder is based on unpriced index-linked contracts and spot sales.
􀁑 Volume adjustment. We make a downward adjustment to Bukit Asam’s production in 2011-13, which we attribute to insufficient investment in the mines and underlying infrastructure. The company produced 3mt in Q111 (20% of our new estimate), while we believe Q2 production will be similar. Our new production estimate is down 7-13% to 14.9mt, 17mt and 19.5mt in 2011-13, respectively. We expect primary production growth over the next three years to be driven by additional railway wagons and engines that management expects to add to the existing railway line in H211.
􀁑 Cost inflation. We make an upward revision to costs following overall inflation in fuel, labour and heavy equipment.

We base our price target on a 12-month target PE valuation of 14.3x, which incorporates a 7.6% risk-free rate, 1.2x beta and a 13.5% cost of equity. Our previous 12.9x target PE was based on a 7.6% risk-free rate, 1.3x beta and 14.1% cost of equity Bukit Asam is currently trading in the mid-to-upper range of its historical PE and EV/EBITDA band.