INDY : Integrating coal business - Mandiri

The completion of of the 51% acquisition of MBSS funded through bank loan, will enhance the synergy of INDY’s coal business integration. We prefer to focus more on its coal-mining related business rather than its EPC business due to the latter’s thin margin and high execution risk. We found Chevron’s PMECS project worth US$375mn that had been put in Tripatra’s backlog last year, now is being retendered. But Tripatra now is aiming at the Exxon Mobil’s Cepu project worth US$450mn with high possibility for it to win. In addition, Petrosea also is eyeing a pipeline project worth US$1.1bn this year. INDY is expected to refinance its Senior Notes US$250mn- 8.5% falling due in 2012. We expect core growth driver would come from Kideco, Petrosea and MBSS.

Underperforming FY10 results. INDY reported underperforming FY10 net profit of Rp772.7bn (+6.5% yoy, -101.0% qoq) followed by significant decrease of gross profit to Rp612.4bn (-1.2% yoy, -78.5% qoq), which was mostly caused by higher costs from Tripatra, delay of Pertamina Gas’s contract and Adaro’s OLC project, Indika’s M&A costs, exploration costs, consulting fees which were fully expensed, plus rupiah attrition concurrently. FY10 dividend received from Kideco increased by 42.7% yoy to US$182.2mn.

Kideco’s outlook. Kideco will further expand its infrastructure installed capacity toward 50Mtpa this year which will cost around US$28mn. This capex is part of the US$55mn capex earmarked for this year including US$21mn in maintenance. Kideco expects to book average selling price of US$66/ton, or 22.2% yoy growth with lower SR of 6.2x translating into favourable cash cost of US$31/ton. Dividend payout ratio will remain at 90% this year. Kideco prudently only sets a target for coal production of 31Mt this year, 6.8% yoy growth. But we believe there will be an upside risk on its coal production considering big coal players are aiming at round 8-12% growth this year. We also expect robust growth in Santan Batubara.

Revisit model, consolidate MBSS. We have revisited our model and taken into account MBSS’s book into INDY’s book. However, we came up with flat adjusted FY11F-12F net profit of Rp1,716bn and Rp2,519bn respectively since we prefer to be more conservative in INDY’s cost structure. But we expect attractive one-time gain from Petrosea’s minimal 20% refloat plan that will be executed in 2Q11-3Q11. We find attractive upside risk from Petrosea, in which our valuation show that Petrosea’s fair market cap should be around Rp4tn implying around 10x PER11F offering around 50% upside gain from the current market cap of Rp2.7tn.

Remain Buy, lower TP. Based on our revisited mode we arrived at higher SOTP of Rp6,200/share. However, we put 20% discount in our SOTP-TP considering execution risk on Tripatra’s business. As a result we tag lower TP at Rp5,200 implying 15.7x PER11F and we maintain our Buy rating.