Indika (INDY IJ) - CLSA

Jayden re-initiates his coverage on Indika (INDY IJ) with an Underperform call and TP of Rp4,000. Jayden is using SOTP valuation with 20% discount to NAV, reflecting the conglomerate structure of the group.

The stock has been an underperformer during 1H11, due to earnings disappointments (one offs at oil and gas contractor Tripatra). The division remains a perennial risk of lumpy earnings and cost impacts, very hard to forecast.

Relisting mining contractor Petrosea (PTRO IJ) will lead to one off after tax gain of US$53mn in 1Q12. Normalising for the one off gain for relisting PTRO, the stock is actually not that cheap at adjusted PER of 10.9x.

Sales desk thinks that the long term picture is good. Challenge will be integrating the pieces together (PTRO, coal logistic company MBSS, and Cirebon power plant), but once that’s done it could be a powerful combination. INDY is acquiring good assets at reasonable prices. The group is working very hard and we like the diligent approach that the group takes.

Key points from the report:
INDY acquired PTRO in July 2009. INDY must increase the free-float of the company by a minimum 16.6%. This will create a one off US$53m windfall to earnings during 1Q12CL. But we believe the relisting of PTRO is already priced in by the market.
INDY this year acquired 51% of coal logistics company MBSS (MBSS IJ) during 2Q11 for Rp1.46t (US$170m). Integrating the various divisions will take time.
It has awarded a coal mining contract from 46% owned coal miner Kideco to contractor Petrosea (PTRO IJ). INDY expects completion of its Cirebon Electric power plant in 1Q12.
660MW Cirebon Independent Power station will be completed in 1Q12 to offtake coal production.
Our 8% 3 year production Cagr is below other major peers targeting 12% to 13% production growth. INDY is investing the dividends from Kideco into PTRO and MBSS to support earnings growth in these divisions.
Valuation: normalizing for the one off gain for relisting PTRO, our valuation of 10.9x 12CL PE, is in line with prior years, and offers only 4% upside.