CIMB IND PT BORNEO LUMBUNG ENERGI & METAL (BORN.JK): BORN OF QUALITY: INITIATE AT OVERWEIGHT

Initiate at OW with a price target of Rp1,850: We believe PT Borneo Lumbung Energi & Metal TBK (BORN) is a beneficiary of tight supply-demand in the Asia/Pacific coking coal industry, given the superior quality of its coal and proximity to end markets. While the lack of a track record introduces uncertainty regarding execution and volume growth, we believe our forecasts are sufficiently conservative. Even so, we expect BORN to deliver a 2010-12 EBITDA CAGR of 94%. We thus set our price target at Rp1,850 based on a 2011EV/EBITDA of 8.5x. This is at a premium to the 2011 industry average EV/EBITDA of 8.0x, reflecting BORN's strong earnings momentum as well as the upturn of the coking coal cycle. Assuming no disruption to production or logistic and BORN achieves its sales volume, fair value could reach Rp2,150, we estimate. 

Strong earnings momentum: Our estimated 94% 2010-12 EBITDA CAGR to US$524mn by 2012 is driven by 1) higher margins, and 2) growing production volume. While BORN's production cost is higher than that of other coal companies in our coverage, its per tonne EBITDA margin is over US$80/t, vs. an average US$40/t for our coverage companies; moreover, we expect a higher ASP, in line with rising coking prices until 2013. By end-2011, we expect BORN to ramp up production capacity at its Kohong block to 5.0mt vs. 3.6mt this year. 

Structurally positive on coking coal: We remain bullish on the outlook for coking coal and expect the seaborne market to remain tightly balanced. Already we are seeing spot coking prices rising on the back of disruption to the supply from Australia . Over 2010-15, we project demand to grow at a CAGR of 5.8% vs. 6.5% in seaborne coking coal supply. China remains the key demand driver (2010-15E CAGR of 5%), but we also see India emerging as an important coking coal customer (2010-15E CAGR of 16%). 

Stock Rating: Overweight
Industry View: Attractive
ModelWare EPS actual: (Dec 2009) IDR (5)
ModelWare EPS estimate: (Dec 2010) IDR 244; (Dec 2011) IDR 86; (Dec 2012) IDR 147
Share Price: IDR 1,670 (Jan 4, 2011)
Target Price: IDR 1,850
Market Cap (mm): USD 3,288.3