● SEA coal stocks fell almost 20% from the peak with concerns on Indonesia’s macro outlook, news on domestic price cap and possibility of export ban, and easing flood situation in Queensland.
● In our view, domestic price negotiations for 2011 between PLN and domestic producers continue to base on commercial basis rather than as a sign of government intervention. The headline news should subside soon as we expect domestic prices of key contracts to be settled in the next 1-2 weeks.
● Spot coal prices fell slightly with the easing of supply situation caused by the floods in Queensland. Our forecasts assume US$120/t in FY11 and we see no downside risks to our conservative ASP forecast. With improving import demand from China, we expect coal prices to trend higher in 2012 to US$130/t, allowing for ASP of coal companies to reach a new high.
● With higher perceived macro risks on Indonesian market, there is a risk to our target price method, which is based on our target P/E of 18x for JCI. Our valuation sensitivity shows ITMG as the best risk-reward tradeoff and ADRO as the least attractive on the same basis.
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