Report- BUY INDY on un-locking 98.5%-owned PTRO! - Credit Suisse

INDIKA ENERGY (INDY) Report: On track to re-float 98.5%-owned Petrosea – reit Buy!
iSay: CS is forecasting average Thermal Coal benchmark prices of US$125/t 2011F (slightly above weekly NEWC spot FOB US$117/t as of May 20th), US$130/t 2012F, US$120/t 2013F, US$100/t 2014F and US$90/t Long-Term. Figure 2 shoes Indonesia Coal remains most expensive cyclicals in NJA, but Figure 3 & 5 show that INDY is amongst cheapest to Indonesia peers. Figure 18 page shows that INDY is cheapest amongst SEA Coal and China Coal stocks! At Rp4,100- INDY is trading on 10.4x 2011F PER on +167% EPS Growth and implied 31% Upside to SoTP Rp5,400, we reiterate BUY INDY on valuation, integrated Coal and energy-services earnings, good operations and value-unlocking from 3Q refloating of 98.5%-owned subsidiary Petrosea (PTRO).

· Fonny Surya (Report attached): Bapepam is considering changing the regulations for acquired companies, in which the revised regulation would extend the re-listing requirement by six months to 2.5 years. However, we think this extension may not apply to Indika and Petrosea and believe that Indika is prepared to re-list Petrosea by July 2011. One of the requirements for Bapepam to grant the extension is in a situation where the valuation of such a company goes below 10% of the acquisition price at the time of re-floating—this regulation is still being discussed and is not finalised. Given that we expect Petrosea to re-list at a valuation that is considerably higher than the acquisition price of US$103 mn, we think this extension would not apply to Indika.

· Re-floating to unlock Petrosea’s value. If Petrosea were valued at 11x 2011E P/E (versus peers’ average of 13.5x), today’s share price would have implied Kideco’s valuation of 10.5x, well-below its peer’s average of 14.1x. We think Kideco is over-discounted, given its strong execution track record. We believe that the re-floating of Petrosea would unlock the value and prompt a share price re-rating for Indika. In addition, our channel check indicated a new contract for Petrosea from an existing client starting over 4Q11–1Q12, which is likely to surpass our numbers.

· We maintain OUTPERFORM and target price of Rp5,400/share. Our SOTP-based target price of Rp5,400/share for Indika implies 13.5x 2011E P/E. We slightly revised down our earnings by 1.4% and 2.0% for 2011 and 2012, respectively, due to revisions in IDR/USD rate to Rp8,620 and Rp8,175 in 2011 and 2012, respectively. We revised up our production for 2012 onwards by 3–4% due to more pre-stripping to be executed this year.