Harum Energy (HRUM, TP: IDR9,900) - FY10 Results Preview: Delivering as Expected - OSK Nusadana

· FY10 earnings as expected. HRUM reported 2010 earnings of IDR824bn, up 7% y-o-y, which was in line with our estimates but lower than consensus.

· Better operating performance. Coal sales and production volume climbed 24% and 28% to 8.3m tonnes and 7.4m tonnes respectively. The company purchased coal from a 3rd party amounting to 1.3m tonnes, which explains the difference between production and sales volume. Average sales price (ASP) also rose 5% y-o-y to USD75.7/tonne. Nevertheless, total revenue declined by 3% y-o-y to IDR4,486bn due to the impact of currency exchange. Note that the company reports its financials in IDR while generating its revenue in USD. For 2010, IDR actually strengthened against USD by some 13%, which forced the company to book a lower IDR denominated revenue.

· Growth remains intact. Underpinned by the company’s solid performance, we are optimistic that HRUM will continue to increase its coal sales volume further to 10.5m tonnes in 2011 and 14.5m tonnes in 2012. With coal price remains stubbornly at high levels, ASP will also be higher by 10%-3% for 2011f-12f respectively.

· Well positioned for strategic opportunities. As of Dec 2010, HRUM was in a net cash position with total cash of IDR1trn, accounting for 29% of its total assets, which bodes well for the company if there are opportunities available for potential acquisitions as its requirement for future capital expenditure is relatively minimal.

· Maintaining our BUY call. HRUM remains our favorite in the coal sector given its robust production volume growth with potential capacity to support its growth. Our target price is IDR9,900, which implies 18x-13x 2011f-12f earnings. Currently, the counter is trading at 15.8x, which is in line with the industry average of 15.3x. The stock’s catalysts are: i) a strong coal price environment, ii) volume growth momentum to capitalize on better pricing, iii) supply-demand dynamics that are favorable to coal producers, and iv) a proven track record with long experience in the business.