Flavour (Indo): Coal, Astra Int, Garuda, Jasa Marga - Nomura Indonesia

Our hearts and prayers are with the people of Japan who were affected by unfortunate earthquake and tsunami in Japan. Indonesia had similar experience in 2004 and we share your sorrow at this devastating event.

Coal: It is a producer market. The unfortunate earthquake in Japan that cause problem with its nuclear power plant will lead to a stronger bargaining position of coal producers. Japan might have to increase its power production from its other power plants to make up the electricity losses, which means marginally demand increase in coal, fuel, and gas supply. In the long run, re-thinking of nuclear power plant might have positive impact to coal demand.

Isnaputra notes that:

1. Japan is the second largest thermal coal importer in Asia, next to China, with 132.2 mn tons of coal imports for 2011F or approximately 25% of the total Asian seaborne market of 519.4mn tons;

2. According to our Japan power analyst Matsumoto-san, there are 15 nuclear units (15,000MW) suspended due to the earthquake. Assuming half of the power loss to be generated by coal-fired power plants, there will be additional coal import to Japan of some 14mn tons;

3. The additional coal imports will put upward pressure on the thermal coal price as in 2011F we forecast global thermal coal market (without the earthquake in Japan) will be in a deficit of 67.9mn tons;

4. There is a possibility as well that the negotiation between Japan and Australia on the new coal price that is expected to happen this/next week will be delayed;

5. There's been no delay/cancellation on coal shipments from Indonesia to Japan so far. The Indonesian coal companies expect the demand from Japan could increase due to this earthquake;

6. As Indonesia coal companies just priced 30-40% of the 2011F contracts, we believe they will all benefit from higher coal prices. However, we believe those that will benefit most are those that have high exposure to the spot seaborne market. We haven't changed our earnings estimates and price targets, but believe the pecking order will be as follows:

- HRUM IJ (90-95% export with 60-65% exposure to spot market)
- ITMG IJ (90-95% export with 35-40% exposure to spot market)
- BUMI IJ (90-95% export with 30% exposure to spot market)
- ADRO IJ (70% export with 30% exposure to spot market)
- PTBA IJ (30% export)

Limited impact of Japan earth quake to Astra International (through United Tractors). We estimate the impacts of Japan earth quake and the subsequent tsunami to Astra International’s (ASII IJ) earnings to be less than 5%. Reiterate BUY.

The impact mainly comes from its 60% owned subsidiary, United Tractors (UNTR IJ) that sells Komatsu equipments.

No major disruption is expected in automotive production although Astra is still assessing the final situation with its principals and suppliers. Note that most of the cars sold in Indonesia have more than 50% local contents and Astra Honda’s motorcycle has more than 90% local contents.

Impact to United Tractors’s largely comes from sales of new equipments that contribute about 25% of UT’s profit. We estimate import from Japan (mainly large equipments) account for 30%-50% of UT’s new heavy equipments sales. UT imports its large equipments from Japan, Germany, and USA, while smaller heavy equipments are produced by Komatsu in Indonesia and Thailand.

We estimate the rest of UT’s profit comes from after sales services which accounts for another 15-20% of UT’s earnings, contract mining (40% of UT’s earnings), and its coal mines (10%-15% of UT’s earnings) and those will be largely unaffected.

Underwriters of Garuda Indonesia (GIAA IJ) are reported offering the unsold stakes to Rajawali group, Jarum group, and other potential investors. The three state owned underwriters (Bahana, Danareksa, and Mandiri sekuritas) have about 13% stakes in Garuda from unsold shares during the recent IPO.

Jasa Marga (JSMR IJ – Not Rated) was reported to have acquired majority operatorship of Gempol Pandaan toll road in East Java. The 13km toll road is expected to require total investment of Rp1trillion (US$100m) from Jasa Marga who will have 52% stake in the JV that operates the toll road. Jasa Marga is also reported planning to acquire 2 more toll roads East Java with total investments of Rp5.1tn (US$450 mn), after these toll roads development has been delayed for years. Government is currently reviewing status of toll roads development and plan to revoke licenses of toll roads operatorship that has not been developed. Given its experience and relatively stronger financial position than other operators, Jasa Marga stands to benefit from these license revisions to win and become the alternate operator.