ITM (Buy, PT Rp55,000, 15% upside) - UBS

We revise ITM’s earnings from -25% to 49% for 2011-13, while maintaining our Buy rating. Our price target is based on a 12-month PE multiple of 13.5x, which is above the current 13-year reserve life. As such, we believe ITM has another 4-6 years of reserve life upgrade potential throughout the Bharinto, IndoMinco and Trubaindo mines.

􀁑 Average selling price increase. We revise our ASP assumption from -7% to 17% in 2011-13 in line with our higher benchmark price forecast. ITM has priced 50% of its 2011 volume YTD, while the remainder is based on unpriced index-linked contracts and spot sales.
􀁑 Volume adjustment. We make a 2% downward adjustment to production volumes in line with management’s recent target revision to 24mt in 2011. The company cites higher-than-usual precipitation.
􀁑 Cost inflation. We make an upward revision to costs following overall inflation in fuel, labour and heavy equipment.

We base our price target on a 12-month target PE valuation of 13.5x, which incorporates a 7.6% risk-free rate, 1.2x beta and 13.7% cost of equity. Our previous target PE of 12x was based on a 7.6% risk-free rate, 1.2x beta and 13.8% cost of equity. ITM is currently trading in the mid-to-high range of its historical PE and EV/EBITDA band.