Citigroup Coal - too early to take profit? (17 Jan 11)

* Post his downgrade on the sector in Nov, KimKwie maintains his cautious tone on the coal sector, citing limited upside as post 25-40% recent shr px gain, Indon coal now trades at 5% premium to China's (vs 30% discount in past 4yrs). Current shr prices already reflect US$120/t coal px in 2011, and he questions the sustainability of coal px to remain elevated with futures market pricing in lower px for the next 12mths. Also, minimal impact from Queensland's flooding, only 2mt of thermal coal lost or 0.5% of global seaborne market.

* His only Buy is on ADRO (TP RP3,200) on attractive valuation 11.8x PE and 6.1x EV/Ebitda for 2011 or 17%-22% discount to global peers.

* Risk to KimKwie's call is it may be a tad too early to take profit. We are still in the midst of fund rotation from interest-sensitive to coal stocks coupled with analysts' coal px upward revision.

* Sensitivity on pg4 if you disagree with our US$110/t coal assumption for 2011. Using US$120/t coal px, ADRO trades at 9.2x '2011 PE and 4.7x EV/Ebitda, ITMG is at 9.3x PE and 5.6x EV/Ebitda - Too early to take profit now?  Moreover, with rising inflation scares, the sector may still be a favorite for inflation hedges a while longer…I still like ADRO, ITMG, and HRUM (high portion of spot mkt, with strong growth potential at consensus EPSg 84% in 2011)

https://www.citigroupgeo.com/pdf/SAP43309.pdf