ITMG:Still lack of M&A plan, valuation driven - Mandiri

In an analyst meeting last week, the company highligted lower sales volume of 5.2Mt in 2Q11, -5%qoq and 10% below 2Q11 production volume of 5.8Mt, mainly due to weather factor. Also, the unexpected jump in production volume in late 2Q11 led to some delay on shipment. Production capacity has been ramped up significantly by 15-20% in July-August on average. By mid August 2011, Indominco will have produced 2Mt coal vs its new high record internal target of 4.3Mt, expecting 26.5% qoq growth. We still found lack of progress on its M&A plan. With net cash almost US$400mn, ITMG’s catalyst will remain on its dividend payout and valuation wise. We made minor changes in our earning forecasts with higher ASP offset by higher production cost and rupiah appreciation. As we rolled over into 2012 valuation, our blended approach derived higher TP for ITMG at Rp62,300 (11.6% higher than previous TP) implies 13.3x PER12F and offering 40.0% upside. We reiterate our Buy rating.

1H11 results slightly below our estimates. ITMG posted 1H11 net profit of US$205mn (+53.1%yoy, +15.6%qoq) slightly below our expectation and consensus, realizing 42.6% our FY11F and 43.8% consensus, mainly due to lower sales volume and higher production cost than expected. However, 1H11 coal production reached 11Mt, relatively in line with our expectation and representing 45.8% of FY11F.

Company remains confident with 25Mt target. Other mine’s coal production were relatively in line with internal target, except Jorong that has achieved 0.7Mt coal or 70% of its FY11 target. Tandung Mayang and Bharinto blocks will commence production in 3Q11 and 4Q11 with each target of 0.5Mt and 0.2Mt respectively. ITMG is still confident with its FY11 target of 25Mt vs our conservative assumption of 24Mt.

Still expecting derivative gain end of year 2011. The company still expects to book derivative gains of approximately US$10mn by end of 2011 mainly due to fuel swap contract price that has been locked in attractively at US$116/brl or US$0.73/litre vs internal diesel assumption rate of US$1.2-1.3/litre for FY11F.

Indicated FY11F ASP of US$92-94/ton. Despite of slowing China demand, the company highlighted stronger coal demand in the Atlantic region due to higher gasoline price and some railway problem in South Africa that support global coal prices. Due to the fluctuation in the commodity prices following uncertain and sluggish global economy recovery, the company has locked in the pricing 97% of its FY11F sales volume with indicated ASP around US$92-94/ton, 7-9% higher than our old assumption.