PT Indo Tambangraya Megah Tbk Higher Cash Cost Will Not Harm ITMG - AAA

Summary
Weak performance in 1Q11 will be compensated by higher up coming output and ASP. However we are expeting cash cost to increase, therefore reiterate buy wih lower tp from Rp61,800 to Rp57,400

± 1Q11 Result, Weaker Output but Stronger Margin on Higher ASP
Nevertheless ITMG’s net profit in 1Q11 at US$95 mn only represents 19.5% of our FY11F which considered to be low since ITMG 1Q10 net profit represented 30% of its FY10 net profit and also production output from ITMG biggest mine Indominco was 600,000 ton, below company’s target at 3.7 mn ton due to heavy rainfall. ITMG still be able to book higher margin, net margin increased from 16% in 1Q10 to 20% in 1Q11, lifted by: 1) 20% increase in sales to US$486 mn due to 31% higher ASP to US$87.3/ton. 2) ITMG has successfully transformed its derivative from loss position in FY10 to gain position in derivative by US$9 mn due to gain on gas and oil fuel contracts in 1Q11.

± Catalyst for 2011
We expect better performance in 2011 and 2012 due to: 1) higher production output, Bharinto mine is expected to commence its production and will contribute an additional of 0.5 mn ton by the end of this year. 2) Demand for coal is tend to increase as China will increase its coal consumption by 10 – 12%. In addition, newly built Japanese port will boost its demand, since Japan is the largest ITMG buyer. 3) Higher efficiency, as Bontang Power Plant has started its operation. 4) ITMG’s good coal quality, with the range of 6,000-6,700 caloric value which will enable it to maintain its domestic and international demand, hence higher ASP. 5) Plenty of cash for future expansion in order to increase its resource.

± Valuation, BUY – New TP Rp57,400
Although with higher upcoming production volume and higher ASP, we are expecting higher cash cost. Thus we lower our TP from Rp61, 800 to Rp57, 400. Our TP implies PE 15.3.x FY11F. Currently ITMG is traded only at PE 13.8.x/10.4x FY11F/FY12F, which is traded at bargain as peers traded at PE 17.1.x FY11F/PE 13.1 FY12F. BUY