Indo Tambangraya Megah - Least preferred in the sector (ITMG-HOLD-IDR46,700-TP:IDR47,000) - Bahana

1Q11: Net profit up 41% y-y, in line with our but below consensus
ITMG reported 1Q11 net profit of USD95m, up 41% y-y and 438% q-q, in line with our estimate (22.7%) helped by USD9.4m derivative gain, but still below consensus (19.4%). Operating profit in 1Q11 came inline within our estimate, forming some 21% of our full-year estimate, but below consensus expectation forming only about 18% of the estimates. On the top line, ITMG booked 1Q11 revenues of USD468m (+16% y-y or 4.2% q-q) on the back of higher ASP up 31% y-y, as volumes were down 14.5% y-y to 5.2m tons and production was down 13% y-y. Though revenues came in line with consensus (forming 21%), higher cost then expectation dragged down the operating profit below consensus. COGS were up 16% y-y driven by higher cash cost of USD58.5/ton (+21% y-y) on rising fuel cost and higher stripping ratio on Indominco (+2% y-y) and Jorong mine (+25% y-y).

2011 earnings remain intact
ITMG has secured around 62% contracted volumes with selling price of around USD87/ton. Out of remaining 38%, 24% is index linked with the rest remain uncommitted. Based on this, ITMG provides an 2011 ASP guidance between the range of USD85-90/ton. Production cash cost is expected to rise by 11% y-y to USD44/ton, pushing up total cash cost by 14% y-y to USD65/ton. Based on the recent company guidance, we arrived at ASP of USD88.9/ton with total cash cost of USD64.3/ton. This translates into net income of USD419m (+105% y-y). Note there has been continuous downgrade in consensus estimates, bringing our current forecast to 10% below consensus forecasts compared to 22% on March 4, 2011.

Significantly higher 2011 Capex of USD126m, up 39% y-y
ITMG has allocated 2011 Capex of USD126m, much higher than 2010 Capex of USD80-90m. The breakdown of the 2011 Capex would be as follow: around USD57.2m would go towards Trubaindo infrastructure, USD7.1m for Indominco East block washing plant, USD7.2m for Indominco port improvement, USD10.6m for Mayang equipment, USD10.5m for Bharinto development and USD33.4m for maintenance and improvement initiatives.

Reserve expanded & new mine acquisition on the cards
In 2011, ITMG is looking at acquiring new mines with criteria for selection as follows: (1) The mine can produce at least 2-3m tons p.a.; (2) Can be sub-bituminous coal but not in the very low range (3) The new mine must be close to the existing mine; (4) Mine life of at least 15 years and (5) The mine should be green field.

Less than 15% upside; Retain HOLD with TP of IDR47,000
In 2010, ITMG’s dividend payout ratio was 76%, the highest in the sector. The company has USD294m cash in 2010 and we have assumed a 60% dividend payout from 2011 onwards. This translates to highest dividend yield of 4.2% in the sector. We maintain our TP of IDR47,000 and HOLD rating.