coal sector 15-nov-2017 concessions will remain the key coal supply bottleneck in indonesia....
TRANSCRIPT
ed:CK / sa:MA, PY
2018: Muted output growth to support coal prices
Strong coal prices will support miners’ ASP in 2018
Coal output growth to remain modest next year
Market is still being conservative in pricing coal miners
Top picks of the sector: ITMG and ADRO
Sustained high coal prices will benefit miners’ ASP in
2018. Strong coal prices in 4Q17 will support coal miners’ ASP and earnings performance in 2018. While coal prices are still above our long-term benchmark average price of US$65-70 per ton, we believe that coal prices will remain robust as the rainy weather around Kalimantan mining concessions will hinder any strong output expansion, even as coal prices stay at a relatively high level of above US$75 per ton.
Muted coal output growth will keep coal prices strong.
The limited capital availability to develop and redevelop mining concessions will remain the key coal supply bottleneck in Indonesia. Existing well-established coal miners are still aiming for flattish to single-digit indicative growth for coal output in 2018. Moreover, given the lack of consolidation opportunities, we expect some coal miners to preserve their coal reserves to extend their operational activities going forward.
Market still conservative on coal counters, pricing in
higher fuel prices. We believe the strong earnings potential of coal miners should be valued higher than 10.0x FY18F PE. As Indonesian coal players have also adopted a conservative mining strategy, there is leeway to deliver sustainable earnings growth, even if crude oil prices approach US$65 per bbl, by focusing on maintaining their solid cost structure.
We prefer miners with strong cost control, exposure to
export market – ITMG and ADRO. We prefer miners with sound operational and cost control over its mining activities, such as ADRO and ITMG. Both miners also have the largest exposure to the export market. In our view, we believe the export market will provide better pricing leverage amid higher global coal benchmark prices relative to the domestic market currently.
JCI : 5,988.30
Analyst William SIMADIPUTRA +62 2130034939 [email protected]
Adaro Energy : Indonesia second largest coal producer. It also has subsidiaries that operate in the mining contracting, barging and ship loading business
Indo Tambangraya Megah : One of the largest coal mining company Banpu. Coal consession located in Kalimantan, Indonesia
Tambang Batubara Bukit Asam : Indonesia largest coal miners with 1.99bn ton of coal reserves. Main coal mining concession located in Tanjung Enim, south Sumatera
Newcastle coal price benchmark trend forecast
Source: DBSVI
0
20
40
60
80
100
120
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q19F
Newcastle coal price (US$/ton)
DBS Group Research . Equity 15 Nov 2017
Indonesia Industry Focus
Thermal coal sector
Refer to important disclosures at the end of this report
STOCKS
12-mth
Price Mkt Cap Target Performance (%)
Rp US$m Price (Rp) 3 mth 12 mth Rating
Adaro Energy 1,815 4,287 2,500 (2.2) 9.3 BUY Indo Tambangraya Megah 20,575 1,717 25,000 0.7 14.3 BUY Tambang Batubara Bukit Asam 11,800 2,006 16,900 (10.3) (13.2) BUY
Source: DBSVI, Bloomberg Finance L.P. Closing price as of 14 Nov 2017
Industry Focus
Thermal coal sector
Page 2
Margin management is the key thing to watch
We believe the coal miners that can manage their margins well will emerge as the winners in 2018. The still high coal prices do not mean that all coal miners can post stronger- than-expected earnings in 2018, in the face of higher crude oil prices next year. We understand that the average coal benchmark price is still hovering around the US$90 per ton level in December, which is fairly high relative to our long-term coal price forecast of US$65-70 per ton. However, given the latest supply developments, we believe that the global coal benchmark price in 2018 will potentially stay at above US$75 per ton. We are expecting a 10%-12% y-o-y increase among miners’ ASP next year. However, as the higher coal price ASP trend may be offset by higher crude oil prices, we expect a more stable earnings performance in 2018. This is still largely in line with our expectations for coal companies earnings outlook under our coverage, even as coal prices have performed stronger than expected YTD.
Newcastle coal price vs. crude oil price trend
Source: Bloomberg Finance L.P, DBSVI
Sustained high coal prices will benefit miners’ coal
pricing in 2018.
Stronger coal prices in 4Q17 will support coal miners’ ASP and earnings performance in 2018. Coal pricing contracts are essentially a B2B arrangement between coal miners and buyers – which typically are direct end users such as power plants and cement producers, or coal traders. The pricing mechanism is usually based on the trailing performance of the average coal benchmark index, be its three months or six months, with a portion of the sales volume using spot pricing.
Coal miners’ ASP trend and coal benchmark price trend
Source: Company, DBSVI
Given that the coal price outlook will remain strong until 4Q17 on winter seasonal restocking, we believe that the coal benchmark index buoyancy will benefit coal miners in terms of ensuring that coal prices remain robust in 2018. We understand that relying on negotiations per se will not help boost miners’ coal pricing to US$80-90 per ton, though the currently buoyant sentiment on coal prices could provide a benchmark price floor of US$70-75 per ton for coal miners. Newcastle coal price benchmark trend (US$ per ton)
Source: Bloomberg Finance L.P, DBSVI
Slow supply expansion will persist in 2018 Besides the seasonal winter restocking that will support coal demand in the short term, we believe that coal price has limited downside potential even if it is trading at a relatively high level of US$90 per ton in view of the slower-than-expected output expansion from seaborne miners, especially in Indonesia. In the short term, a protracted rainy season in Kalimantan concession areas would continue to hinder production activities in 2H17. This poses another short-term output expansion challenge for Indonesian coal miners. The resultant slower-than-expected output expansion would certainly not
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.30
Oct‐16
Nov‐16
Nov‐16
Dec‐16
Dec‐16
Jan‐17
Jan‐17
Feb‐17
Feb‐17
Mar‐17
Mar‐17
Mar‐17
Apr‐17
Apr‐17
May‐17
May‐17
Jun‐17
Jun‐17
Jul‐17
Jul‐17
Aug‐17
Aug‐17
Aug‐17
Sep‐17
Sep‐17
Oct‐17
Oct‐17
Coal price (US$/ton) WTI crude oil price (US$/bbl)
0
20
40
60
80
100
120
2011
2012
2013
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
ITMG ADRO PTBA HRUM Benchmark price
0
20
40
60
80
100
120
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18F
2Q18F
3Q18F
4Q18F
1Q19F
2Q19F
3Q19F
4Q19F
Newcastle coal price (US$/ton)
Parity movement trend in coal and oil price; expecting stable margin performance in 4Q17 and 2018
Industry Focus
Thermal coal sector
Page 3
be able to rebalance coal prices towards the range of US$70-75 per ton. As a result, Indonesia is likely to miss its FY17 coal production target of 477m tons, given that 1H17 domestic coal production came in at only 139m tons. In the medium term, we also see a number of challenges for miners in ramping up their production. Their mining strategy that was previously adapted to cope with low coal prices may hurt several miners’ long-term mineable coal reserves in light of the aggressive cut in strip ratio involved. Adjusting the strip ratio could provide a short-term solution for some miners, but a massive overhaul of their current mining strategy may be required in the long term. The thinning credit flow towards resources-related sectors, such as coal mining, will limit producers’ ability to expand their output, whether for developing their existing mining concessions or acquiring new mining concessions. We have yet to see a major revival in credit appetite towards the sector. Perhaps the creditors are still spooked by the incidence of rising non-performing loans (NPL) that hurt the banking industry in 2012-2014. Credit flow to mining resources sector
Source: Bank Indonesia, DBSVI
Moreover, mining machinery distributors are still conservative in managing their orders and inventory. Machinery players such as United Tractors (UNTR IJ), the main distributor of Komatsu machineries, are still reluctant to take on a higher inventory level despite its improving sales volume. UNTR’s sales volume reached 320 units per month on average in 2017, which represents an improvement compared to that of 2015-2016 but still lower vs. that of 2011. However, UNTR has no intentions to restock its machinery inventory on a large scale to boost its product availability in domestic machineries market.
UNTR’s machinery sales volume trend
Source: Company, Bloomberg Finance L.P, DBSVI
The lack of new machinery availability means that miners could resort to the secondary market which sometimes entails higher risks, in view of the generally poor maintenance for used machineries amid a coal industry slump in 2012-2014. The listed miners, despite their strong financial position, are also reluctant to aggressively ramp up the intensity of their mining activities, such as boosting the strip ratio and volume output. After all, they have a prudent capital spending policy and intend to preserve their coal mining reserves for the future. We think the conservative stance of the well-established coal miners could reflect their primary goal of maintaining a strong financial performance, mainly profitability per ton, instead of embarking on volume expansion. This attests to the fact that the companies are aware as to what drives their share price performance, which is in line with our critical factor analysis. Note that our findings reveal that companies’ ability to deliver on the profitability front is highly correlated to share price performance. Hence, amid rising coal prices, miners could grow their revenue on the back of a conservative output expansion target as well as keep their strip ratio low. As a result, miners’ revenue could grow at double digits.
0%
1%
1%
2%
2%
3%
3%
4%
4%
5%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Jan‐07
Jul‐07
Jan‐08
Jul‐08
Jan‐09
Jul‐09
Jan‐10
Jul‐10
Jan‐11
Jul‐11
Jan‐12
Jul‐12
Jan‐13
Jul‐13
Jan‐14
Jul‐14
Jan‐15
Jul‐15
Jan‐16
Jul‐16
Jan‐17
Mining resources loan (Rpbn) % total loan
0
20
40
60
80
100
120
140
0
100
200
300
400
500
600
Jan‐12
Apr‐12
Jul‐12
Oct‐2012
Jan‐13
Apr‐13
Jul‐13
Oct‐2013
Jan‐14
Apr‐14
Jul‐14
Oct‐2014
Jan‐15
Apr‐15
Jul‐15
Oct‐2015
Jan‐16
Apr‐16
Jul‐16
Oct‐2016
Jan‐17
Apr‐17
Jul‐17
Mining machineries (units)‐ LHS Coal price (US$ per ton) ‐ RHS
Industry Focus
Thermal coal sector
Page 4
UNTR’s mining contracting activities trend
Source: Company, DBSVI What is priced in? We believe that the market has priced in a less rosy coal price outlook, i.e. the market believes the high coal prices will not be sustainable as potentially strong coal supply growth could lead to a lower supply-demand equilibrium, and hence the normalisation of coal prices. The market’s cautious stance on coal stocks is reflected in the sector’s undemanding valuation. Coal miners are still trading at a reasonable valuation of 9.0x-10.0x FY18F PE despite our earnings forecasts also take into account a more stable
profitability outlook for next year, as the higher-than-expected coal benchmark price performance YTD will be offset by higher fuel costs amid rising crude oil prices in 2018. We believe that the consensus view expects coal prices to trade at US$65-75 per ton in 2018. We think that the consensus price range is still conservative hence, a severe share price correction may not take place even if coal prices fall within this range. Next year, we still see the possibility that the miners will book better-than-expected earnings performance on slow cash cost expansion. The miners are now more careful in extracting their remaining coal reserves, reserves optimization means there could be positive earnings surprises for coal players moving forward vs. market expectations. Moreover, pro-longed bad weather conditions this year, which seems to continue in 1Q18, would also reduce the miners’ appetite to mine in higher strip concessions in view of the lower mining effectiveness - we could see the strip ratio and operating cash cost remaining at low levels.
PTBA’s forward PE band
Source: Bloomberg Finance L.P, DBSVI
ITMG’s forward PE band
Source: Bloomberg Finance L.P, DBSVI
ADRO’s forward PE band
Source: Bloomberg Finance L.P, DBSVI
0
2
4
6
8
10
12
0
2
4
6
8
10
12
Jan‐12
Apr‐12
Jul‐12
Oct‐2012
Jan‐13
Apr‐13
Jul‐13
Oct‐2013
Jan‐14
Apr‐14
Jul‐14
Oct‐2014
Jan‐15
Apr‐15
Jul‐15
Oct‐2015
Jan‐16
Apr‐16
Jul‐16
Oct‐2016
Jan‐17
Apr‐17
Jul‐17
Monthly coal production volume (mn tons) ‐ LHS Strip ratio (X) ‐ RHS
Industry Focus
Thermal coal sector
Page 5
Key risks
Still no developments for domestic coal price regulation We do not account any meaningful progress to Indonesia’s cost-plus margin domestic coal pricing mechanism in our view toward the coal stocks. However, if it materialized, the cost plus margin mechanism may impact coal miners’ coal pricing and earnings performance, especially the miners that exposes to the domestic coal market such as PTBA. Our view is the new price regulations may not materialise in view of the accompanying challenges, such as the flexibility for miners to divert their sales volume to export markets which requires them to sidestep their domestic market obligation (DMO) requirement. Moreover, we think coal pricing regulations will face challenges in getting the approval from coal sellers, who believe that a fixed volume is an integral part of negotiations.
Impact of China’s NDRC actions on current coal price
trend We have yet to see any strong stance being adopted by the National Development and Reform Commission (NDRC), besides encouraging domestic coal miners to increase their supply to cope with the currently high coal prices and seasonally high domestic demand. The NDRC’s policies may affect global supply and demand dynamics, as China is the largest coal importer in the world. It also controls over 30% of global coal output. Higher-than-expected crude oil prices Higher fuel prices may weigh on coal miners’ margins next year especially if crude oil prices go above US$70/bbl, which is a tad higher than our FY18 forecast of US$65/bbl. Fuel costs account for around 25%-30% of coal miners’ operational cash cost.
Industry Focus
Thermal coal sector
Page 6
Company Guides
ed: CK / sa:MA, PY
BUY Last Traded Price ( 14 Nov 2017): Rp1,815 (JCI : 5,988.30) Price Target 12-mth: Rp2,500 (38% upside) Analyst William SIMADIPUTRA +62 2130034939 [email protected]
What’s New Raise TP to Rp2,500, maintain BUY rating
Our earnings are above consensus
We believe ADRO’s strong earnings outlook has not been priced in
Currently, it is trading at 8.3x FY18F PE
Price Relative
Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 2,524 3,101 3,273 3,500 EBITDA 813 1,231 1,281 1,315 Pre-tax Profit 547 949 987 1,017 Net Profit 335 497 516 532 Net Pft (Pre Ex.) 335 497 516 532 Net Pft Gth (Pre-ex) (%) 119.1 48.3 3.9 3.1 EPS (Rp) 142 210 219 225 EPS Pre Ex. (Rp) 142 210 219 225 EPS Gth Pre Ex (%) 119 48 4 3 Diluted EPS (Rp) 142 210 219 225 Net DPS (Rp) 31.0 105 109 113 BV Per Share (Rp) 1,342 1,447 1,557 1,669 PE (X) 12.8 8.6 8.3 8.1 PE Pre Ex. (X) 12.8 8.6 8.3 8.1 P/Cash Flow (X) 6.3 5.8 5.0 5.7 EV/EBITDA (X) 6.5 4.1 3.7 3.4 Net Div Yield (%) 1.7 5.8 6.0 6.2 P/Book Value (X) 1.4 1.3 1.2 1.1 Net Debt/Equity (X) 0.1 0.0 CASH CASH ROAE (%) 11.1 15.1 14.5 14.0 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 203 203 203 Other Broker Recs: B: 25 S: 2 H: 1
Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P
Still on the rise
TP raised to Rp2,500, keep BUY call. Our higher TP comes on the heels of higher earnings forecasts – mainly thanks to ADRO’s stronger-than-expected YTD performance, particularly 3Q17. NPAT came in at US$150m (+73.3% y-o-y, +19.8% q-o-q) on the back of higher coal prices and a still low mining strip ratio. Our FY17F/18F earnings rise by 16%/12% to US$496m/ US$516m, as we lower our coal price discount (pushing our price assumption closer to our coal price benchmark forecast). Also, we lift our 2018 coal output by 2% to 55m tons. Where we differ: Strong earnings growth not priced in. We are confident that ADRO’s profitability will improve. Beyond stabilising coal prices, we believe that it has solid cost-saving strategies such as business line integration and conservative mining approach that had allowed it tide through various cycles of the coal industry. We also believe the earnings recovery trend has not been fully priced in at the current share price. Earnings momentum and steady coal price are share price catalysts in 4Q17. Besides the earnings recovery momentum that we believe will persist in 4Q17, steady coal prices also will support ADRO’s share price. Seasonal winter restocking from September-December may provide the upside potential for coal prices, relative to our Newcastle coal price benchmark forecast of US$65-70 per ton. As such, we believe ADRO’s earnings performance will top consensus expectations this year. Valuation:
We keep our BUY call with a DCF-based TP of Rp2,500 (WACC of 12.1% and terminal growth rate of 0%). This implies an FY17F PE of 11.4x, which is in line with its 5-year average. Key Risks to Our View:
2017 coal pricing and mining management. Our forecast is dependent on ADRO’s capability to secure favourable coal prices from buyers, and its efficiency strategy. At A Glance Issued Capital (m shrs) 31,986 Mkt. Cap (Rpm/US$m) 58,054,521 / 4,287 Major Shareholders (%) Adaro Strategic Investment 43.9 Thohir Garibaldi 6.5 Soeryadjaya Edwin 4.3
Free Float (%) 45.3 3m Avg. Daily Val (US$m) 4.9 ICB Industry : Basic Materials / Mining
DBS Group Research . Equity 15 Nov 2017
Indonesia Company Guide
Adaro Energy Version 8 | Bloomberg: ADRO IJ | Reuters: ADRO.JK Refer to important disclosures at the end of this report
Page 8
Company Guide
Adaro Energy
WHAT’S NEW
Still on the rise
Earnings revision: Keeping our earnings forecasts above consensus.
Our FY17F/18F earnings rise by 16%/12% to US$496m/ US$516m, as we lower our coal price discount (pushing our price assumption closer to our coal price benchmark forecast). Moreover, we lift our 2018 coal output by 4% to 55m tons. Our new earnings forecasts are still above consensus’. We believe that consensus has not taken into account the positive impact of its spot pricing sale on its earnings performance. ADRO’s coal pricing benefited from higher-than-expected coal benchmark prices vs. our forecast. As around 4% of 9M17 coal sales volume was sold under spot pricing, this has helped boost ADRO’s YTD revenue and earnings. We adjust our coal ASP to bake in the higher-than-expected YTD revenue. Our FY17/18 new ASP at US$54.6/US$56 per ton are 6%/4% higher than out previous forecast. We believe our coal price assumption is reasonable as the still high coal benchmark prices can have an impact on average selling price in 4Q17 and 2018. Moreover, we also nudge up our FY18F/19F coal output target by 2%/3% to 55m/58.8m tons to account for the still high coal prices, which give ADRO the room to raise its coal output. Moreover, the abundant coal reserves on hand means that ADRO could maintain its operational flexibility edge and keep its cash cost per ton in check – thus maintaining its margins. We bake in ADRO‘s ongoing operational flexibility by changing our cash cost ex. royalty assumption to US$29 per ton in FY18 and US$30 per ton in FY19, backed by its steady mining strip ratio and mining contracting fees. The still low fuel prices will also help boost ADRO’s cash cost performance next year. 3Q17 performance: Above our and consensus forecasts.
ADRO delivered a solid earnings performance in 3Q17, thanks to steady YTD coal prices and its efficiency-enhancement efforts. Net profit after tax (NPAT) came in at Rp150bn (+73.3% y-o-y, +19.8% q-o-q), well above our and consensus forecasts.
Thanks to the solid coal ASP of US$58.8 per ton (+40% y-o-y, +0.9% q-o-q) and steady coal sales volume of 14.2m tons (+6.8% y-o-y, +7.6% q-o-q), ADRO’s 3Q17 revenue surged to
US$890m (+47.1% y-o-y, +8.1% q-o-q), which is above our and consensus forecasts.
As ADRO’s costs were stable in 3Q17, the higher ASP had a huge impact on its y-o-y earnings performance. The impressive profit performance was supported by its sound mining activity management, i.e. its ability to keep the operating cash cost per ton low. Its strip ratio expanded to 5.0x in 3Q17, on track to meet management’s FY17 guidance of 4.85x, after falling short of the guidance in 1H17. The higher strip ratio was accompanied by a higher estimated cash cost per ton of US$25.5 per ton in 3Q17 (2Q17 : US$24 per ton), which is still within our expectation.
NEW TP: TP raised to Rp2,500, maintain BUY rating
Our DCF-based TP rises as we bump up our earnings forecasts. Our TP implies an FY18F PE of 11.4x, which we believe is undemanding considering its solid cost control and steady coal benchmark price performance outlook in 4Q17. These factors bode well for ADRO’s coal pricing contract negotiations for commercial year 2018. ADRO remains one of our top picks in the coal sector.
Quarterly production and strip ratio trend
Source: Company, DBSVI
12.0 11.8
13.1 14.1
12.5 12.7
14.0
11.6 12.6
13.2 13.5 13.3
11.8
13.314.2
0
1
2
3
4
5
6
7
0
2
4
6
8
10
12
14
16
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Coal production volume (mn tons) - LHS Strip ratio (X) - RHS
Page 9
Company Guide
Adaro Energy
Quarterly / Interim Income Statement (US$m)
FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq
Revenue 603 823 890 47.7 8.1
Cost of Goods Sold (440) (508) (563) 28.1 10.9
Gross Profit 163 315 327 100.6 3.7
Other Oper. (Exp)/Inc (17.1) (57.4) (44.4) 159.1 (22.7)
Operating Profit 146 258 282 93.7 9.6
Other Non Opg (Exp)/Inc (11.0) (8.1) (6.3) 42.6 (21.6)
Net Interest (Exp)/Inc 0.0 0.0 0.0 nm nm
Pre-tax Profit 135 250 276 104.9 10.6
Tax (46.9) (111) (111) 137.3 0.5
Minority Interest (1.3) (13.7) (14.8) (1,035.0) 7.9
Net Profit 86.6 125 150 73.3 19.8
Net profit bef Except. 86.6 125 150 73.3 19.8
EBITDA 227 350 380 67.4 8.6
Margins (%)
Gross Margins 27.0 38.3 36.7
Opg Profit Margins 24.2 31.3 31.7
Net Profit Margins 14.4 15.2 16.9
Source of all data: Company, DBSVI
Earnings revision summary
2017F 2018F 2019F
Old New Changes Old New Changes Old New Changes
Revenue (US$ m)
2,945
3,101 5% 3,104 3,273 5% 3,281 3,500 7%
Gross profit (US$ m)
1,019
1,154 13% 1,090 1,206 11% 1,111 1,247 12%
Operating profit (US$ m)
857
983 15% 920 1,026 12% 931 1,054 13%
EBITDA (US$ m)
1,105
1,231 11% 1,175 1,281 9% 1,192 1,316 10%
Net profit (US$ m)
429
496 16% 459 516 12% 466 532 14%
Production (m tons)
53.5
53.5 0% 54 55.06 2% 57 58.8 3%
ASP (US$ per ton)
51.7
54.6 6% 54 56 4% 53.9 55.9 4%
Cash cost per ton (US$ per ton)
27.6
27.6 0% 29 29 0% 29.56 30 0%
SG&A % sales -6% -6% 0% -6% -6% 0% -6% -6% 0%
Source : DBSVI
Page 10
Company Guide
Adaro Energy
CRITICAL DATA POINTS TO WATCH
Critical Factors
Still relatively flat production outlook. We assume coal output growth to be relatively flat over FY16-18F, premised on ADRO’s defensive strategy of prioritising profitability over expanding production. The Tutupan and Paringin concessions will remain the largest contributors (48m tons), accounting for 96% of ADRO's coal production. Improved coal price outlook. Coal ASP will improve alongside the better Newcastle coal benchmark price outlook. We expect ASP to climb to US$52 per ton in FY17 before rising further to US$54 per ton in FY18, in line with our higher coal benchmark price forecast of US$65 per ton next year. A higher ASP for coal will allow ADRO to expand its profitability and deliver better earnings growth. Lower cash cost on better operational efficiency. We have assumed a slightly lower cash cost of U$33.6 per ton for FY17, while conservatively imputing similar mining contracting rates for this year. We have factored in lower fuel cost in our cash cost estimate. ADRO’s cost-saving measures would help boost its earnings. A lower fuel cost will also help ADRO reduce cash cost per ton. ADRO’s fuel cost reached US$0.7/litre last year and, at current coal prices, fuel cost is US$0.5 per litre, half of its 5-year average. Ongoing refinancing efforts to reduce cost of debt. ADRO will continue to reduce borrowing cost via refinancing. Its interest dropped by 16% in FY16 to US$41m. ADRO's access to competitive financing terms bodes well for the company; it recently refinanced its existing debt with Adaro Indonesia (involving a US$1bn loan facility) at a lower borrowing cost.
Sales volume (m tons)
ASP (US$/ton)
Cash cost/ ton (US$/ton)
EBITDA margin (%)
Interest expenses (US$mn)
Source: Company, DBSVI
Page 11
Company Guide
Adaro Energy
Appendix 1: A look at Company's listed history – what drives its share price?
Adaro’s share price vs. operating margin performance Remarks
ADRO’s share price has been tracking its profitability since 2009. Profitability contraction, despite the seasonal high in 1Q and low in 4Q over the past five years due to lacklustre coal prices, has weighed on ADRO’s share price. ADRO then initiated an intensive efficiency-enhancement programme in 1H16, resulting in a strong performance in 2H16, amid high coal prices.
*share price in US dollar currency Adaro’s share price performance vs. JCI since January 2009
Remarks
The chart here shows
that the market has not
really priced in a scenario
of a coal price recovery,
as the share price has
been underperforming
the index since January
2009. ADRO’s share
price tend to outperform
when coal prices are
bullish, as seen in 1Q09-
1Q12.
Adaro’s share price performance vs. coal price trend since January 2009 Remarks Share price Coal price
Historically, ADRO’s
share price has tracked
the Newcastle coal price
benchmark and we
believe the trend will
persist, given that coal
price is a significant
driver of ADRO’s profit.
Beyond ADRO’s earnings
recovery, a steady coal
price outlook in 2H17 on
seasonal winter restocking
will support ADRO’s share
performance in 2H17.
(10)
0
10
20
30
40
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
Jan‐09
Nov‐09
Sep‐10
Jul‐11
May‐12
Mar‐13
Jan‐14
Nov‐14
Sep‐15
Jul‐16
May‐17
PX_LAST OPER_MARGIN
‐
0.5
1.0
1.5
2.0
2.5
3.0
3.5
Jan‐09
Nov‐09
Sep‐10
Jul‐11
May‐12
Mar‐13
Jan‐14
Nov‐14
Sep‐15
Jul‐16
May‐17
ADRO JCI
0
0
0
1
1
1
1
1
2
2
2
0
1
2
3
4
5
6
7
8
Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15 Jan‐16 Jan‐17
ADRO Coal price
Share price downtrend on profitability contraction era due to bearish coal price cycle
Market understand seasonal strong profitability in 1Q of the year
Sustaining strong profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16
The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist
Adaro underperformed the index during the prolonged coal price downtrend since 2012.
Page 12
Company Guide
Adaro Energy
Balance Sheet:
Deleveraging on progress. ADRO will continue to deleverage its balance sheet in the absence of plans to acquire new coal assets. However, its foray into power plants means that ADRO cannot fully be a debt-free coal miner because it would need to rely on third-party financing to supplement weak internal cashflow generation. Modest capex outlook, ample reserves. We forecast ADRO will spend US$200m per year on capex in 2017-2018, mainly to expand output at existing concessions, for its downstream power plant project, and the maintenance of machinery. Our capex assumption is in line with management’s new guidance for FY17. ADRO has 1.1bn tons of coal reserves, sufficient to last 20 years at the current extraction rate. As such, ADRO can focus on the capex needs of its coking coal project. Share Price Drivers:
Better profitability leads to a higher share price. ADRO’s share price tracks its profitability outlook. A better profitability outlook leads to a higher share price and vice versa. ADRO successfully boosted its profitability in 2016, getting close to the levels prior to the coal price downtrend in 2015. Key Risks:
Coal price. The price of coal is the key upside/downside risk for coal miners, as they are price takers with minimal pricing power. Despite the fact that the impact of higher or lower coal prices is not fully reflected in ADRO’s quarterly earnings, the coal price sentiment can affect ADRO’s stock price. Execution risk. If ADRO fails to meet its targeted production volume and cash cost per ton, ADRO could miss our earnings estimate. Company Background
ADRO is Indonesia's second-largest coal producer. It sells 75% of its production to the export market and the rest in the domestic market. It has subsidiaries that operate in the mining contracting, barging and ship-loading, and water-tolling businesses.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBSVI
Page 13
Company Guide
Adaro Energy
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F Sales volume (m tons) 51.4 52.6 53.5 55.1 58.8 ASP (US$/ton) 46.9 43.4 54.6 55.9 55.9 Cash cost/ ton (US$/ton) 39.2 35.8 33.6 34.0 34.0 EBITDA margin (%) 27.2 35.4 39.7 39.1 37.6 Interest expenses (US$mn) 48.9 40.9 33.7 38.9 37.2
Segmental Breakdown
FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (US$m) Coal Mining 2,492 2,347 2,921 3,078 3,289 Mining Contracting 123 111 145 160 176 Others 70.4 66.0 35.0 35.0 35.0 Total 2,685 2,524 3,101 3,273 3,500
Income Statement (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 2,685 2,524 3,101 3,273 3,500 Cost of Goods Sold (2,141) (1,839) (1,948) (2,067) (2,254) Gross Profit 543 685 1,154 1,206 1,247 Other Opng (Exp)/Inc (211) (97.7) (171) (180) (193) Operating Profit 332 588 983 1,026 1,054 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (3.0) (0.2) (0.2) (0.2) (0.3) Net Interest (Exp)/Inc (48.9) (40.9) (33.7) (38.9) (37.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 280 547 949 987 1,017 Tax (129) (206) (446) (464) (478) Minority Interest 1.40 (6.1) (6.7) (7.3) (7.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 153 335 497 516 532 Net Profit before Except. 153 335 497 516 532 EBITDA 550 813 1,231 1,281 1,315 Growth Revenue Gth (%) (19.3) (6.0) 22.9 5.5 7.0 EBITDA Gth (%) (17.3) 47.8 51.4 4.0 2.7 Opg Profit Gth (%) (32.7) 76.9 67.3 4.3 2.7 Net Profit Gth (Pre-ex) (%) (14.2) 119.1 48.3 3.9 3.1 Margins & Ratio Gross Margins (%) 20.2 27.2 37.2 36.8 35.6 Opg Profit Margin (%) 12.4 23.3 31.7 31.3 30.1 Net Profit Margin (%) 5.7 13.3 16.0 15.8 15.2 ROAE (%) 5.4 11.1 15.1 14.5 14.0 ROA (%) 2.5 5.4 7.4 7.4 7.4 ROCE (%) 3.1 6.3 8.5 8.5 8.5 Div Payout Ratio (%) 49.4 21.9 50.0 50.0 50.0 Net Interest Cover (x) 6.8 14.4 29.1 26.4 28.3
Source: Company, DBSVI
Page 14
Company Guide
Adaro Energy
Quarterly / Interim Income Statement (US$m)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 603 746 727 823 890 Cost of Goods Sold (440) (526) (509) (508) (563) Gross Profit 163 220 218 315 327 Other Oper. (Exp)/Inc (17.1) (14.3) (28.6) (57.4) (44.4) Operating Profit 146 205 189 258 282 Other Non Opg (Exp)/Inc (11.0) (8.2) (7.4) (8.1) (6.3) Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 135 197 182 250 276 Tax (46.9) (67.4) (71.6) (111) (111) Minority Interest (1.3) (3.8) (12.8) (13.7) (14.8) Net Profit 86.6 126 97.1 125 150 Net profit bef Except. 86.6 126 97.1 125 150 EBITDA 227 268 276 350 380 Growth Revenue Gth (%) 2.2 23.8 (2.6) 13.2 8.1 EBITDA Gth (%) 10.2 18.1 3.0 26.8 8.6 Opg Profit Gth (%) 22.2 40.9 (8.0) 36.3 9.6 Net Profit Gth (Pre-ex) (%) 38.8 45.5 (22.9) 28.9 19.8 Margins Gross Margins (%) 27.0 29.5 29.9 38.3 36.7 Opg Profit Margins (%) 24.2 27.5 26.0 31.3 31.7 Net Profit Margins (%) 14.4 16.9 13.4 15.2 16.9
Balance Sheet (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 3,494 3,981 3,933 3,878 3,816 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 1,372 949 951 954 956 Cash & ST Invts 680 1,098 1,212 1,566 1,798 Inventory 72.8 73.4 45.1 47.9 52.2 Debtors 196 301 425 380 480 Other Current Assets 122 142 246 255 265 Total Assets 5,937 6,543 6,812 7,080 7,368 ST Debt 123 154 56.3 56.3 56.3 Creditor 196 208 267 283 309 Other Current Liab 135 283 297 312 328 LT Debt 1,384 1,280 1,293 1,239 1,184 Other LT Liabilities 768 811 811 811 811 Shareholder’s Equity 2,844 3,167 3,416 3,673 3,939 Minority Interests 487 639 671 705 740 Total Cap. & Liab. 5,937 6,543 6,812 7,080 7,368 Non-Cash Wkg. Capital 58.5 24.9 152 87.7 160 Net Cash/(Debt) (826) (337) (137) 271 558 Debtors Turn (avg days) 32.7 35.9 42.7 44.9 44.8 Creditors Turn (avg days) 52.0 45.7 51.0 55.4 54.2 Inventory Turn (avg days) 16.1 16.5 12.7 9.4 9.2 Asset Turnover (x) 0.4 0.4 0.5 0.5 0.5 Current Ratio (x) 2.4 2.5 3.1 3.5 3.7 Quick Ratio (x) 1.9 2.2 2.6 3.0 3.3 Net Debt/Equity (X) 0.2 0.1 0.0 CASH CASH Net Debt/Equity ex MI (X) 0.3 0.1 0.0 CASH CASH Capex to Debt (%) (3.1) 49.7 14.8 15.4 16.1 Z-Score (X) 2.1 2.2 2.4 2.6 2.6
Source: Company, DBSVI
Page 15
Company Guide
Adaro Energy
Cash Flow Statement (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 280 547 949 987 1,017 Dep. & Amort. 221 226 248 255 262 Tax Paid (129) (206) (446) (464) (478) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (88.0) (94.2) (36.9) 58.4 (78.2) Other Operating CF (3.1) 208 25.3 26.2 27.9 Net Operating CF 281 681 740 863 750 Capital Exp.(net) 47.1 (712) (200) (200) (200) Other Invts.(net) 68.2 281 (2.3) (2.5) (2.6) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 8.90 122 (104) (9.4) (10.1) Net Investing CF 124 (309) (306) (212) (213) Div Paid (75.5) (73.2) (248) (258) (266) Chg in Gross Debt (374) (72.2) (84.6) (54.6) (54.6) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (21.0) 192 14.2 14.9 15.6 Net Financing CF (471) 46.2 (319) (298) (305) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (65.2) 418 115 353 233 Opg CFPS (Rp) 157 328 329 341 351 Free CFPS (Rp) 139 (13.5) 229 281 233
Source: Company, DBSVI
Target Price & Ratings History
Source: DBSVI
Analyst: William SIMADIPUTRA
ed: JS / sa:MA, PY
BUY Last Traded Price ( 14 Nov 2017): Rp20,575 (JCI : 5,988.30) Price Target 12-mth: Rp25,000 (22% upside) Analyst William SIMADIPUTRA +62 2130034939 [email protected]
What’s New Raising TP to Rp25,000; maintain BUY rating
Sustained strong cash margins should be a share price catalyst
Raised our FY17/18F earnings
Barring M&As, dividend yield stays > 7%
Price Relative
Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 1,368 1,703 1,842 1,942 EBITDA 272 380 400 423 Pre-tax Profit 192 320 339 361 Net Profit 131 234 247 263 Net Pft (Pre Ex.) 131 234 247 263 Net Pft Gth (Pre-ex) (%) 107.1 78.7 5.9 6.4 EPS (Rp) 1,568 2,802 2,968 3,157 EPS Pre Ex. (Rp) 1,568 2,802 2,968 3,157 EPS Gth Pre Ex (%) 107 79 6 6 Diluted EPS (Rp) 1,568 2,802 2,968 3,157 Net DPS (Rp) 498 1,961 2,078 2,210 BV Per Share (Rp) 10,874 11,714 12,605 13,552 PE (X) 13.1 7.3 6.9 6.5 PE Pre Ex. (X) 13.1 7.3 6.9 6.5 P/Cash Flow (X) 7.6 5.3 5.7 5.4 EV/EBITDA (X) 5.1 3.3 2.9 2.6 Net Div Yield (%) 2.4 9.5 10.1 10.7 P/Book Value (X) 1.9 1.8 1.6 1.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 15.0 24.8 24.4 24.1 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 2,643 2,575 2,521 Other Broker Recs: B: 19 S: 0 H: 7
Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P
Upside risk on coal reserves life
Raised TP to Rp25,000, maintain BUY. Indo Tambangraya Megah (ITMG)’s earnings rebounded strongly by 52.3% q-o-q in 3Q17 to US$107m (+102% y-o-y), ahead our and consensus forecast. ASP expanded by 8% q-o-q to US$73.9 per ton (+48% y-o-y) in 3Q17, and coupled with 3% lower average COGS/ton (excl. Royalty) at US$42.2/ton, led to the strong jump in earnings despite the steep rise in average strip ratio to 13.0x. We raised our FY17/18F earnings by 38%/20% to account the stronger than expected coal ASP in the period, better cost outlook as a result of its cost optimisation program, offset by the higher strip ratio. Where we differ: we are forecasting positive earnings growth in 2018 vs. flat estimate by consensus. We believe that ITMG’s earnings has not peaked yet given the steady coal price performance and there is room for output expansion. We reiterate our positive stance on its long-term profitability given its ability to maintain a relatively healthy cash margin despite a higher strip ratio. Moreover, higher coal prices also provides upside risk to ITMG’s reserves life, earnings growth and share price’s valuation. Positive catalyst: consistent earnings growth and attractive dividend yield. ITMG’s dividend yield remains the highest among its peers. We think ITMG will distribute 70% of its FY18 profit, translating to a dividend yield of 9.6% in 2018. Valuation:
We keep our BUY call with a DCF-based TP of Rp25,000 (WACC of 12.1% and terminal growth rate of 0%). This implies an FY17F PE of 8.7x,which is still below with its 5-year average PE multiple of 10.7x. Key Risks to Our View:
2017 coal pricing and mining management. Our forecast is dependent on ITMG capability to secure favourable coal prices from buyers, and its efficiency strategy. At A Glance Issued Capital (m shrs) 1,130 Mkt. Cap (Rpm/US$m) 23,248,207 / 1,717 Major Shareholders (%) Adaro Strategic Investment 43.9 Thohir Garibaldi 6.5 Soeryadjaya Edwin 4.3
Free Float (%) 45.3 3m Avg. Daily Val (US$m) 2.1 ICB Industry : Basic Materials / Mining
DBS Group Research . Equity 15 Nov 2017
Indonesia Company Guide
Indo Tambangraya Megah Version 8 | Bloomberg: ITMG IJ | Reuters: ITMG.JK Refer to important disclosures at the end of this report
Page 17
Company Guide
Indo Tambangraya Megah
WHAT’S NEW
Upside risk on coal reserves life
3Q17 earnings : Above our expectation.
Earnings rebounded strongly by 52.3% q-o-q in 3Q17 to US$107m (+102% y-o-y), ahead our and consensus forecast. ASP expanded by 8% q-o-q to US$73.9 per ton (+48% y-o-y) in 3Q17, and coupled with 3% lower average COGS/ton (excl. Royalty) at US$42.2/ton led to the strong jump in earnings despite the steep rise in average strip ratio to 13.0x. ITMG delivered a strong financial performance despite the higher strip ratio trend. We see the trend as positive for ITMG’s long term reserves life performance, as the higher strip ratio trend means there are more mineable coal reserves going forward. ITMG’s reported estimated reserves is still at 8 years, however, looking at its high strip ratio outlook and current coal price trends, we believe ITMG has operational flexibility, as seen in its strong performance in 3Q17, which translate into higher mineable coal reserves. Moreover, low fuel prices helped ITMG to keep its cash cost per ton low despite the higher strip ratio trend in 3Q17. Fuel cost accounts for approximately 30% of ITMG’s operational cash cost ex. Royalty. Going forward, ITMG is evaluating several ways to mitigate the rising fuel cost such as purchasing its own fuel at more competitive prices. We estimate its own sourcing fuel strategy can reduce the cost per litre by 10%, or it could put in place a hedging strategy. Earnings revision: Raising earnings forecast by 38%/20% in FY17/18. We raised our FY17/18F earnings by 38%/20% to account for the stronger coal ASP outlook in the period, despite the higher strip ratio application. Our earnings were slightly above consensus as we believe ITMG would be able to maintain strong margins despite the higher fuel cost, thanks to emerging operational flexibility given the higher coal price trend Higher ASP signals strong coal supply and demand trend. ITMG realised stronger ASPs compared to our estimate, which implies stronger off take from shorter-term contract buyers, or buyers were keen to pay the spot price. We think this is a good sign that supply and demand trends are still healthy.
Maintain BUY with new TP Rp25,000 based on DCF
Our higher TP reflects the higher earnings and free cash flows for next year – amid the stable capital expenditure outlook. We still assume a conservative long term reserves life of 8 years in our forecast despite coal price trading at US$90 per ton. This means that ITMG has better operational flexibility and mineable coal reserves; upside risk to our TP. Our TP implies FY18F P/E of 8.7x.
Coal pricing trend (US$/ton)
Source: Company, DBSVI
Strip ratio trend (X)
Source: Company, DBSVI
-40%
-30%
-20%
-10%
0%
10%
20%
30%
0
20
40
60
80
100
120
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
ITMG ASP (US$ per ton) - LHS Newcastle coal index (US$ per ton)-LHS
Discount/premium to benchmark price -RHS
13.112.2
1110
8.7 8.69.5
7.1
8.68.1 8.3
7.4
9.410.1
13
0
2
4
6
8
10
12
14
2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17
Strip ratio (X)
Page 18
Company Guide
Indo Tambangraya Megah
Quarterly / Interim Income Statement (US$m)
FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq
Revenue 349 381 415 18.9 9.0
Cost of Goods Sold (272) (283) (281) 3.3 (0.9)
Gross Profit 77.3 97.6 134 73.9 37.6
Other Oper. (Exp)/Inc (30.7) (27.1) (26.9) (12.4) (0.6)
Operating Profit 46.5 70.5 107 130.9 52.4
Other Non Opg (Exp)/Inc (1.3) (0.4) (17.1) nm nm
Net Interest (Exp)/Inc 0.30 0.60 0.70 151.5 17.1
Pre-tax Profit 45.5 70.8 91.1 100.2 28.7
Tax (12.4) (22.6) (24.2) 95.3 6.9
Net Profit 33.1 48.1 66.9 102.0 39.0
Net profit bef Except. 33.1 48.1 66.9 102.0 39.0
EBITDA 59.0 70.5 107 82.0 52.3
Margins (%)
Gross Margins 22.1 25.6 32.4
Opg Profit Margins 13.3 18.5 25.9
Net Profit Margins 9.5 12.6 16.1
Source of all data: Company, DBSVI
Earnings revision summary
2017F 2018F 2019F
Old New Changes Old New Changes Old New Changes
Revenue (US$m) 1,578 1,703 8% 1,707 1,842 8% 1,800 1,942 8%
Gross profit (US$m) 354 452 28% 397 463 17% 422 492 17%
EBITDA (US$m) 292 380 30% 343 400 17% 363 423 17%
Net profit (US$m) 170 234 38% 206 247 20% 219 263 20%
Production volume (m ton) 26.0 26.0 0% 28.0 28.0 0% 29.5 29.5 0%
ASP (US$ per ton) 62.0 67.0 8% 62.0 67.0 8% 62.0 67.0 8%
Cash cost per ton (US$/ton) 36.4 36.8 1% 36.2 38.0 5% 36.2 38.00 5%
Source : Company, DBSVI
Page 19
Company Guide
Indo Tambangraya Megah
CRITICAL DATA POINTS TO WATCH
Critical Factors
Earnings to grow by 79% in FY17, on higher coal ASP. We forecast earnings will grow by 79% y-o-y to US$234m in FY17 before growing further by 6% y-o-y to US$247m in FY18. The higher revenue and earnings in FY17 would be mainly driven by the better coal ASP outlook, coupled with a higher cash margin per ton, despite ITMG's flat production and sales volume growth. Single digit coal output growth. In line with guidance and the group’s focus on profitability rather than production, we assume flat coal production and sales volume of 26m tons in FY17, before growing by 8% y-o-y to 28m tons in FY18. As ITMG’s mines have a remaining life of eight years, ITMG prefers to maintain a flat production volume to ensure stable profitability. We assume ITMG's strip ratio will increase to 10.0x in 2017 vs. 8.6x in 2016 given the brighter coal ASP outlook – hence, ITMG should be able to mine coal in the more pricey concessions (in terms of operational cost). ASP recovery underway. We forecast the benchmark coal price will remain at US$65 per ton beyond 2017. This will affect ITMG’s coal pricing ahead. We assume ASP of US$67 per ton in 2017 and 2018. Our ASP assumption implies a 3% premium to our forecast benchmark price. Higher cash cost on higher strip ratio. Cash cost will increase to US$36.8 per ton in FY17 due to a better strip ratio outlook and higher fuel cost. We also assume fuel cost would increase to US$0.7 per litre (+49% y-o-y) in FY18, on the back of a improved crude oil price outlook. However, we see limited room for mining contracting fees to be renegotiated lower given ITMG’s flat volume growth. Miners with higher strip ratios will benefit from lower fuel prices. Miners, including ITMG, will be the largest beneficiary of lower fuel cost given their high usage of machineries, in our view. A low crude price environment has a positive impact on ITMG’s profitability, as seen last year.
Sales volume (m tons)
Avg selling price (US$/ton)
Cash cost (US$/ton)
Fuel cost (US$/liter)
EBITDA margin (%)
Source: Company, DBSVI
Page 20
Company Guide
Indo Tambangraya Megah
Appendix 1: A look at Company's listed history – what drives its share price? ITMG’s share price vs. operating margin performance Remarks
ITMG’s share price weakness has tracked its profitability and earnings downtrend in tandem with the coal price downcycle that arose from prolonged oversupply conditions in the last five years. Despite its profitability improvement since 2016, its share price has still lagged behind and underperformed the JCI index (see next chart).
*share price in US dollar currency ITMG’s share price performance vs. JCI since January 2009
Remarks
The chart here shows the market has not really priced in the scenario of a coal price recovery, as ADRO’s share price has continued to underperform relative to the JCI index since January 2009. ADRO’s share price tends to outperform during coal price upcycles, as seen in 1Q09-1Q12.
ITMG’s share price performance vs. coal price trend since January 2009 Remarks Share price Coal price
Source: Bloomberg Finance L.P., company, DBSVI
Historically, ADRO’s share price has tracked the Newcastle coal price benchmark trend. We believe the trend will persist given coal price is a significant driver for ADRO’s share price performance. Apart from this, ADRO’s earnings recovery and the steady coal price outlook in 2H17 on seasonal winter restocking will help support ADRO’s share price performance in 2H17.
0
10
20
30
40
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Jan‐09
Nov‐09
Sep‐10
Jul‐11
May‐12
Mar‐13
Jan‐14
Nov‐14
Sep‐15
Jul‐16
May‐17
PX_LAST OPER_MARGIN
‐
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan‐09
Nov‐09
Sep‐10
Jul‐11
May‐12
Mar‐13
Jan‐14
Nov‐14
Sep‐15
Jul‐16
May‐17
ITMG JCI
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15 Jan‐16 Jan‐17
ITMG ‐ RHS Coal price
Share price downtrend on profitability contraction era due to bearish coal price cycle
Sustaining strong profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16
ITMG underperformed the index during the prolonged coal price downtrend since 2012. The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist
OPM (%) Share px performance (X)
Page 21
Company Guide
Indo Tambangraya Megah
Balance Sheet:
Net cash position. ITMG’s has a net cash balance sheet as a strategy to cope with the challenging coal price environment. Its net cash position also means that ITMG will be able to pursue acquisition of reserves when opportunities present.
Share Price Drivers:
Stock valuation had de-rated on bleak industry outlook in the past three years. ITMG’s share price has de-rated because of concerns over its depleting reserves, barring any potential sizeable acquisitions ahead. Its limited reserves could also hurt earnings if it needs to cut output further, thus restricting its ability to lower its strip ratio.
Key Risks:
Drop in coal prices. Coal miners are price-takers, with little pricing power. Furthermore, the pricing outlook is more challenging now, given the abundant supply and slower coal demand growth due to environmental concerns. Operational risk. If ITMG fails to secure meaningful coal reserves in the future, it may have to halt operations. Moreover, the efficiency-focused strategy may not lead to meaningful reductions in cash cost. Profitability risk. We have assumed that ITMG would maintain its cash margin by lowering its production. It is possible that ITMG may need to further cut its coal production volume if the remaining profitable concessions do not meet their expectations. Company Background
ITMG is one of the largest coal mining companies owned by Banpu. The scope of the business includes coal mining operation, processing and logistics. ITMG owns majority stares in seven subsidiaries and operates six mining concessions in Kalimantan Island.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBSVI
Page 22
Company Guide
Indo Tambangraya Megah
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F Sales volume (m tons) 25.0 25.7 26.0 28.0 29.5 Avg selling price (US$/ton) 63.6 56.6 67.0 67.0 67.0 Cash cost (US$/ton) 38.2 35.6 36.8 38.0 38.0 Fuel cost (US$/liter) 0.70 0.50 0.70 0.70 0.70 EBITDA margin (%) 12.6 19.9 22.3 21.7 21.8
Income Statement (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 1,589 1,368 1,703 1,842 1,942 Cost of Goods Sold (1,239) (1,037) (1,251) (1,378) (1,450) Gross Profit 350 331 452 464 492 Other Opng (Exp)/Inc (157) (122) (136) (129) (136) Operating Profit 194 209 316 335 356 Other Non Opg (Exp)/Inc (57.4) (18.0) 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 3.30 1.50 4.40 4.40 4.40 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 139 192 320 339 361 Tax (76.3) (61.3) (86.4) (91.5) (97.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 63.1 131 234 247 263 Net Profit before Except. 63.1 131 234 247 263 EBITDA 200 272 380 400 423 Growth Revenue Gth (%) (18.2) (14.0) 24.5 8.2 5.5 EBITDA Gth (%) (35.5) 35.7 39.8 5.4 5.7 Opg Profit Gth (%) (18.0) 7.7 51.3 6.0 6.4 Net Profit Gth (Pre-ex) (%) (68.5) 107.1 78.7 5.9 6.4 Margins & Ratio Gross Margins (%) 22.0 24.2 26.5 25.2 25.3 Opg Profit Margin (%) 12.2 15.3 18.5 18.2 18.3 Net Profit Margin (%) 4.0 9.6 13.7 13.4 13.6 ROAE (%) 7.3 15.0 24.8 24.4 24.1 ROA (%) 5.1 10.9 18.2 17.6 17.5 ROCE (%) 9.5 15.2 22.9 22.6 22.4 Div Payout Ratio (%) 63.1 65.7 125.1 74.2 74.5 Net Interest Cover (x) NM NM NM NM NM
Source: Company, DBSVI
Page 23
Company Guide
Indo Tambangraya Megah
Quarterly / Interim Income Statement (US$m)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 349 409 368 381 415 Cost of Goods Sold (272) (272) (253) (283) (281) Gross Profit 77.3 137 115 97.6 134 Other Oper. (Exp)/Inc (30.7) (33.5) (25.8) (27.1) (26.9) Operating Profit 46.5 104 89.2 70.5 107 Other Non Opg (Exp)/Inc (1.3) (11.1) (1.5) (0.4) (17.1) Net Interest (Exp)/Inc 0.30 0.60 0.70 0.60 0.70 Pre-tax Profit 45.5 93.0 88.3 70.8 91.1 Tax (12.4) (31.8) (31.2) (22.6) (24.2) Net Profit 33.1 61.1 57.2 48.1 66.9 Net profit bef Except. 33.1 61.1 57.2 48.1 66.9 EBITDA 59.0 104 89.2 70.5 107 Growth Revenue Gth (%) 25.4 17.2 (10.1) 3.5 9.0 EBITDA Gth (%) 84.4 75.5 (13.9) (20.9) 52.3 Opg Profit Gth (%) 132.0 122.5 (13.9) (20.9) 52.4 Net Profit Gth (Pre-ex) (%) 146.1 84.6 (6.5) (15.8) 39.0 Margins Gross Margins (%) 22.1 33.5 31.2 25.6 32.4 Opg Profit Margins (%) 13.3 25.3 24.2 18.5 25.9 Net Profit Margins (%) 9.5 14.9 15.5 12.6 16.1
Balance Sheet (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 255 224 192 167 140 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 412 447 469 493 517 Cash & ST Invts 269 327 454 537 625 Inventory 117 62.0 62.3 68.6 72.2 Debtors 119 125 155 167 176 Other Current Assets 8.40 23.7 24.9 26.1 27.4 Total Assets 1,179 1,209 1,357 1,458 1,558 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 121 94.0 161 178 187 Other Current Liab 164 145 152 160 168 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 59.5 63.5 66.7 70.0 73.5 Shareholder’s Equity 835 906 977 1,051 1,130 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,179 1,209 1,357 1,458 1,558 Non-Cash Wkg. Capital (39.8) (27.9) (71.7) (75.5) (78.7) Net Cash/(Debt) 269 327 454 537 625 Debtors Turn (avg days) 33.2 32.6 30.0 31.9 32.3 Creditors Turn (avg days) 44.5 40.2 39.3 47.2 48.1 Inventory Turn (avg days) 41.5 33.6 19.1 18.2 18.6 Asset Turnover (x) 1.3 1.1 1.3 1.3 1.3 Current Ratio (x) 1.8 2.3 2.2 2.4 2.5 Quick Ratio (x) 1.4 1.9 1.9 2.1 2.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 6.0 6.6 5.9 5.9 5.8
Source: Company, DBSVI
Page 24
Company Guide
Indo Tambangraya Megah
Cash Flow Statement (US$m)
FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 139 192 320 339 361 Dep. & Amort. 64.0 63.0 64.1 65.4 66.7 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 53.9 6.90 36.5 (3.8) (4.7) Other Operating CF (66.2) (36.8) (95.6) (101) (108) Net Operating CF 191 225 325 299 315 Capital Exp.(net) (32.9) (32.2) (32.2) (40.0) (40.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 30.5 (60.1) (13.1) (13.8) (14.5) Net Investing CF (2.4) (92.3) (45.3) (53.8) (54.5) Div Paid (126) (41.5) (164) (173) (184) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (19.9) (33.0) 10.4 10.9 11.5 Net Financing CF (146) (74.5) (153) (162) (173) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 42.5 58.4 127 83.3 87.8 Opg CFPS (Rp) 1,647 2,618 3,460 3,637 3,836 Free CFPS (Rp) 1,898 2,315 3,512 3,112 3,299
Source: Company, DBSVI
Target Price & Ratings History
Source: DBSVI
Analyst: William SIMADIPUTRA
ed: CK / sa:MA, PY
BUY Last Traded Price ( 14 Nov 2017): Rp11,800 (JCI : 5,988.30) Price Target 12-mth: Rp16,900 (43% upside) Analyst William SIMADIPUTRA +62 2130034939 [email protected]
What’s New Maintain BUY with TP of Rp16,900
Trading at low FY18 PE of 6.8x despite strong earnings performance
Stable performance can act as re-rating catalyst
Expecting a strong finish in 4Q17
Price Relative
Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 14,059 16,875 18,742 20,451 EBITDA 2,948 4,298 4,694 5,720 Pre-tax Profit 2,734 4,315 4,791 5,910 Net Profit 2,006 3,235 3,592 4,430 Net Pft (Pre Ex.) 2,006 3,235 3,592 4,430 Net Pft Gth (Pre-ex) (%) (1.5) 61.2 11.0 23.3 EPS (Rp) 871 1,404 1,559 1,923 EPS Pre Ex. (Rp) 871 1,404 1,559 1,923 EPS Gth Pre Ex (%) (1) 61 11 23 Diluted EPS (Rp) 871 1,404 1,559 1,923 Net DPS (Rp) 361 632 701 865 BV Per Share (Rp) 4,523 5,295 6,152 7,210 PE (X) 13.6 8.4 7.6 6.1 PE Pre Ex. (X) 13.6 8.4 7.6 6.1 P/Cash Flow (X) 18.6 6.7 7.6 6.1 EV/EBITDA (X) 8.9 5.9 5.2 4.0 Net Div Yield (%) 3.1 5.4 5.9 7.3 P/Book Value (X) 2.6 2.2 1.9 1.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.5 28.6 27.2 28.8 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 1,498 1,481 1,437 Other Broker Recs: B: 23 S: 1 H: 3
Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P
Attractive valuation on the table Maintain BUY with TP of Rp16,900. PTBA’s share price performance is set to close the gap with its peers ADRO and ITMG. Its current share price provides an attractive potential upside of 40% to our TP, coupled with a dividend yield of 6%. We believe PTBA’s share price correction, in the wake of the announcement of Indonesia’s domestic coal-plus margin pricing mechanism in Oct, is overdone. It is trading at an attractive 6.8x FY18F PE, despite its strong YTD earnings performance. We think the market has fully priced in the negative announcement even in the absence of any follow-up action and clarification.
Where we differ: We are bullish on PTBA’s efficiency programme. Our earnings forecast is above consensus, as we think that PTBA’s low mining contracting expenses will boost its profitability, thanks to its stricter stance in negotiating with third-party mining contractors and plans to expand its in-house mining contractor operations. PTBA aims to achieve a 50:50 ratio for its in-house and third-party mining contractors by around 2025. Moreover, we also believe PTBA that could deliver its expected volume growth of 9% FY16-19F CAGR on the back of railway capacity expansion.
Strong momentum for coal prices supports PTBA’s ASP. We believe PTBA will continue to post strong y-o-y earnings growth momentum (as seen in 3Q17) on sustained coal sales volume growth and higher ASP. Resilient coal pricing will continue to buoy the coal ASP for both its domestic and export markets. Valuation:
We maintain our target price of Rp16,900. Our DCF-based target price (WACC: 11.6%, LT growth: 0%) implies 10.9x FY18F PE. Maintain BUY rating. Key Risks to Our View:
Operational execution risk. If PTBA fails to maintain its low cash cost trend, such as failing to clinch a favourable mining contracting rate from third-party contractors, its earnings could miss our expectations.
At A Glance Issued Capital (m shrs) 2,304 Mkt. Cap (Rpbn/US$m) 27,189 / 2,006 Major Shareholders (%) Republic of Indonesia (%) 65
Free Float (%) 35 3m Avg. Daily Val (US$m) 3.9 ICB Industry : Basic Materials / Mining
DBS Group Research . Equity 15 Nov 2017
Indonesia Company Guide
Tambang Batubara Bukit Asam Version 7 | Bloomberg: PTBA IJ | Reuters: PTBA.JK Refer to important disclosures at the end of this report
Page 26
Company Guide
Tambang Batubara Bukit Asam
CRITICAL DATA POINTS TO WATCH
Critical Factors
NPAT growth will turn positive on better ASP outlook. PTBA’s earnings will grow at a CAGR of 54% over FY16-FY18, on the back of higher coal ASP in both the domestic and export markets. PTBA will maintain its strict efficiency policies and production volume expansion of 12% y-o-y in FY17 and FY18. A higher ASP will allow PTBA to normalise its profitability in FY17 after hitting an all-time low in FY16. Better coal prices for the export market, in line with better outlook for benchmark prices. PTBA’s blended ASP will rise to Rp762k per ton in FY17 on higher benchmark prices. Amid the better outlook for benchmark prices, PTBA’s export prices can outpace domestic prices, which tend to be fixed in the prior year. Production CAGR of 12% over FY16-18F on railway capacity expansion. We assume that PTBA’s coal production and sales volume will grow by 12% CAGR (FY16-18F) to 24.8m tons in FY18 on railway capacity expansion. Our projected production and sales volume is lower than management’s guidance, as our assumption for railway capacity expansion is less bullish, at an 11% CAGR (FY16-18F) to 30m tons. PTBA’s sales volume growth is backed by long-term committed volumes of 574m tons with major buyers, mainly PLN (45% of long-term sales). Stable cash cost outlook given PTBA’s strict cost control and large operational scale. PTBA’s total cash cost (including royalty fees) is estimated to decrease 8% y-o-y, thanks to lower mining contracting fees and other stable operating cash cost, given that the strip ratio will remain stable at 4.5x.
Sales Volume-mn tons
Avg selling price(Ro000/ton)
Cash cost/ton (Rp000/ton)
Capex (Rpbn)
Railway capacity (mn ton)
Source: Company, DBSVI
Page 27
Company Guide
Tambang Batubara Bukit Asam
Appendix 1: A look at Company's listed history – what drives its share price? PTBA’s share price vs. operating margin performance Remarks
PTBA’s share price downtrend has been tracking its profitability and earnings because of falling coal prices (due to prolonged oversupply over the last five years). Despite the profitability improvement since 2016, its share price performance still lags behind that of its peers and the JCI (see next chart).
*share price in US dollar currency PTBA’s share price performance vs. JCI since January 2009
Remarks
The chart here shows
that the market has not
really priced in the
recovery in coal prices, as
the share price has been
underperforming relative
to the JCI since January
2009. PTBA’s share price
tends to outperform
when coal prices are
bullish, as seen in 1Q09-
1Q12).
PTBA’s share price performance vs. coal price trend since January 2009
Remarks Share price Coal price
Source: Bloomberg Finance L.P., Company, DBSVI
Historically, PTBA’s share
price has tracked the
Newcastle coal price
benchmark and we
believe the trend will
persist, given that coal
price is a significant
driver of PTBA’s share
price performance.
Beyond PTBA’s earnings
recovery, a steady coal
price outlook in 2H17 on
seasonal winter restocking
will support PTBA’s share
price in 2H17.
0
10
20
30
40
50
60
0
1
1
2
2
3
3
Jan‐09
Jul‐09
Jan‐10
Jul‐10
Jan‐11
Jul‐11
Jan‐12
Jul‐12
Jan‐13
Jul‐13
Jan‐14
Jul‐14
Jan‐15
Jul‐15
Jan‐16
Jul‐16
Jan‐17
PX_LAST OPER_MARGIN
‐
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Jan‐09
Jul‐09
Jan‐10
Jul‐10
Jan‐11
Jul‐11
Jan‐12
Jul‐12
Jan‐13
Jul‐13
Jan‐14
Jul‐14
Jan‐15
Jul‐15
Jan‐16
Jul‐16
Jan‐17
PTBA JCI
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Jan‐09 Jan‐10 Jan‐11 Jan‐12 Jan‐13 Jan‐14 Jan‐15 Jan‐16 Jan‐17
PTBA Coal price
Share price downtrend on profitability contraction era due to bearish coal price cycle Sustaining strong
profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16
PTBA underperformed the index during the prolonged coal price downtrend since 2012. The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist
Page 28
Company Guide
Tambang Batubara Bukit Asam
Balance Sheet:
Low gearing balance sheet. PTBA has low gearing on the back of the low capex spending in the future. This will give it financial flexibility such as the ability to accelerate power plant projects or pay special dividends if and when coal prices are low. Most of PTBA’s additional loans are allocated to its subsidiaries such as for the equipment and fleet expansion of its mining contracting subsidiary. Share Price Drivers:
Shares move in tandem with coal prices. PTBA's share price is correlated with its profitability outlook, which is determined by two critical factors – coal ASP and its cash cost outlook. A period of higher coal prices is usually followed by higher share prices for coal miners, on the back of better earnings growth and an improved profitability outlook. Key Risks:
Slower-than-expected production expansion. Slower-than- expected railway capacity expansion can lead to disappointing production and sales volume. PTBA relies a lot on the execution and scale of PT KAI’s plan to expand railway capacity. Slower expansion will translate into lower sales volume and revenue growth trend vs. our forecast. Higher-than-expected cash cost. PTBA’s margin will face contraction if it fails to maintain its low cash cost trend, such as failing to renegotiate favourable railway transportation and mining contracting fees with third-party mining contractors, or if PTBA’s new equipment fleet fails to achieve meaningful operating efficiencies. A higher-than-expected cash cost means that PTBA’s margin and earnings growth could be lower than our forecast. Company Background
PTBA is one of Indonesia's largest coal miners, with 1.99bn tons of coal reserves. Its main coal-mining concession is located in Tanjung Enim, South Sumatra. It is a state-owned company, with the government as its major shareholder.
Leverage & Asset Turnover (x)
ROE (%)
Forward PE Band (x)
PB Band (x)
Source: Company, DBSVI
Page 29
Company Guide
Tambang Batubara Bukit Asam
Key Assumptions
FY Dec 2015A 2016A 2017F 2018F 2019F Sales Volume-mn tons 19.3 19.8 22.2 24.8 25.6 Avg selling 769 707 761 767 767 Cash cost/ton (Rp000/ton) 632 607 510 525 525 Capex (Rpbn) 1,742 931 1,484 1,120 941 Railway capacity (mn ton) 22.0 24.0 27.0 30.0 22.7
Income Statement (Rpbn)
FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 13,734 14,059 16,875 18,742 20,451 Cost of Goods Sold (9,594) (9,657) (11,377) (12,701) (13,270) Gross Profit 4,140 4,402 5,498 6,041 7,181 Other Opng (Exp)/Inc (1,725) (1,871) (1,519) (1,687) (1,841) Operating Profit 2,414 2,531 3,980 4,354 5,341 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 134 150 169 188 205 Net Interest (Exp)/Inc 116 52.9 166 250 365 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,664 2,734 4,315 4,791 5,910 Tax (627) (709) (1,079) (1,198) (1,477) Minority Interest (1.2) (18.2) (1.5) (1.6) (1.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,036 2,006 3,235 3,592 4,430 Net Profit before Except. 2,036 2,006 3,235 3,592 4,430 EBITDA 2,699 2,948 4,298 4,694 5,720 Growth Revenue Gth (%) 5.0 2.4 20.0 11.1 9.1 EBITDA Gth (%) 4.4 9.2 45.8 9.2 21.9 Opg Profit Gth (%) 4.5 4.8 57.2 9.4 22.7 Net Profit Gth (Pre-ex) (%) 1.0 (1.5) 61.2 11.0 23.3 Margins & Ratio Gross Margins (%) 30.1 31.3 32.6 32.2 35.1 Opg Profit Margin (%) 17.6 18.0 23.6 23.2 26.1 Net Profit Margin (%) 14.8 14.3 19.2 19.2 21.7 ROAE (%) 23.0 20.5 28.6 27.2 28.8 ROA (%) 12.8 11.3 16.2 15.9 17.5 ROCE (%) 15.6 14.4 19.5 18.3 19.5 Div Payout Ratio (%) 45.0 41.5 45.0 45.0 45.0 Net Interest Cover (x) NM NM NM NM NM
Source: Company, DBSVI
Page 30
Company Guide
Tambang Batubara Bukit Asam
Quarterly / Interim Income Statement (Rpbn)
FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 3,283 4,017 4,547 4,420 4,255 Cost of Goods Sold (2,488) (2,061) (2,855) (2,767) (2,553) Gross Profit 795 1,956 1,692 1,653 1,702 Other Oper. (Exp)/Inc (145) (203) (257) (260) (289) Operating Profit 417 1,197 1,223 1,255 1,229 Net Interest (Exp)/Inc (33.5) (36.7) (56.1) (53.3) (31.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 452 1,289 1,218 1,256 1,252 Tax (111) (283) (335) (393) (334) Minority Interest (0.8) (14.7) (13.0) (9.8) (15.8) Net Profit 340 991 871 853 902 Net profit bef Except. 340 991 871 853 902 EBITDA 0.0 0.0 0.0 0.0 0.0 Growth Revenue Gth (%) 2.2 22.3 13.2 (2.8) (3.7) EBITDA Gth (%) nm nm nm nm nm Opg Profit Gth (%) (8.7) 187.1 2.2 2.6 (2.0) Net Profit Gth (Pre-ex) (%) (10.3) 191.6 (12.2) (2.0) 5.7 Margins Gross Margins (%) 24.2 48.7 37.2 37.4 40.0 Opg Profit Margins (%) 12.7 29.8 26.9 28.4 28.9 Net Profit Margins (%) 10.4 24.7 19.2 19.3 21.2
Balance Sheet (Rpbn)
FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 5,579 6,088 6,097 6,085 6,146 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,717 4,139 5,189 6,066 6,670 Cash & ST Invts 3,115 3,675 5,551 6,940 8,855 Inventory 1,233 1,102 1,298 1,449 1,514 Debtors 1,596 2,285 1,857 2,063 2,251 Other Current Assets 1,654 1,288 1,288 1,288 1,288 Total Assets 16,894 18,577 21,280 23,890 26,724 ST Debt 0.0 490 0.0 0.0 0.0 Creditor 1,146 539 685 765 799 Other Current Liab 3,777 4,013 4,013 4,013 4,013 LT Debt 623 2,141 3,409 3,964 4,326 Other LT Liabilities 2,061 841 841 841 841 Shareholder’s Equity 9,175 10,421 12,200 14,176 16,613 Minority Interests 113 131 131 131 131 Total Cap. & Liab. 16,894 18,577 21,280 23,890 26,724 Non-Cash Wkg. Capital (440) 122 (255) 21.5 240 Net Cash/(Debt) 2,492 1,044 2,141 2,976 4,528 Debtors Turn (avg days) 40.3 50.4 44.8 38.2 38.5 Creditors Turn (avg days) 32.7 32.8 19.9 21.1 21.8 Inventory Turn (avg days) 43.8 45.4 39.0 40.0 41.3 Asset Turnover (x) 0.9 0.8 0.8 0.8 0.8 Current Ratio (x) 1.5 1.7 2.1 2.5 2.9 Quick Ratio (x) 1.0 1.2 1.6 1.9 2.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 279.5 29.5 9.6 8.3 9.8 Z-Score (X) 4.4 4.2 4.3 4.2 4.3
Source: Company, DBSVI
Page 31
Company Guide
Tambang Batubara Bukit Asam
Cash Flow Statement (Rpbn)
FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 2,664 2,734 4,315 4,791 5,910 Dep. & Amort. 150 267 318 340 362 Tax Paid (627) (709) (1,079) (1,198) (1,477) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 245 (1,165) 378 (277) (219) Other Operating CF 285 336 105 (85.9) (88.5) Net Operating CF 2,717 1,462 4,037 3,571 4,487 Capital Exp.(net) (1,742) (776) (328) (328) (423) Other Invts.(net) (134) (155) (1,156) (792) (518) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 90.0 (1,147) 0.0 0.0 0.0 Net Investing CF (1,786) (2,078) (1,484) (1,120) (941) Div Paid (1,050) (832) (1,456) (1,616) (1,994) Chg in Gross Debt (806) 2,008 779 555 362 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (1,855) 1,175 (677) (1,062) (1,631) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (924) 559 1,876 1,389 1,914 Opg CFPS (Rp) 1,073 1,140 1,588 1,670 2,042 Free CFPS (Rp) 423 298 1,610 1,408 1,764
Source: Company, DBSVI
Target Price & Ratings History
Source: DBSVI
Analyst: William SIMADIPUTRA
Industry Focus
Thermal coal sector
Page 32
DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends Completed Date: 15 Nov 2017 15:11:34 (WIB) Dissemination Date: 15 Nov 2017 15:56:03 (WIB)
Sources for all charts and tables are DBSVI unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by PT DBS Vickers Sekuritas Indonesia (''DBSVI''). This report is solely intended for the clients of DBS Bank Ltd, its respective
connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form
or by any means or (ii) redistributed without the prior written consent of PT DBS Vickers Sekuritas Indonesia (''DBSVI'').
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,
the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other
factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or
warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without
notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific
investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees
only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial
advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit)
arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not
to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons
associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have
positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and
other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Industry Focus
Thermal coal sector
Page 33
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public
offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage
in market-making.
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has
procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of
research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment
banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment
banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), DBSV HK or their subsidiaries and/or other affiliates have a
proprietary position in Adaro Energy and Indo Tambangraya Megah recommended in this report as of 30 Oct 2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
Compensation for investment banking services:
3. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a
manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further
information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document
should contact DBSVUSA exclusively.
Disclosure of previous investment recommendation produced:
4. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other
investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12
months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by
DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his
spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
Industry Focus
Thermal coal sector
Page 34
RESTRICTIONS ON DISTRIBUTION
General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”). DBS holds Australian Financial Services Licence no. 475946. DBSVS is exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. DBSVS is regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.
Hong Kong This report has been prepared by an entity(ies) which is not licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong). This report is being distributed in Hong Kong and is attributable to DBS Vickers Hong Kong Limited, a licensed corporation licensed by the Hong Kong Securities and Futures Commission to carry on the regulated activity of advising on securities pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).
For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].
Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.
Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.
Wong Ming Tek, Executive Director, ADBSR
Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No.
198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.
Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.
Industry Focus
Thermal coal sector
Page 35
United Kingdom
This report is produced by PT DBS Vickers Sekuritas Indonesia which is regulated by the Otoritas Jasa Keuangan (OJK). This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.
Dubai International Financial Centre
This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
United Arab Emirates
This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent.
United States This report was prepared by PT DBS Vickers Sekuritas Indonesia (''DBSVI''). DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.
Other jurisdictions
In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.
Industry Focus
Thermal coal sector
Page 36
DBS Regional Research Offices HONG KONG DBS Vickers (Hong Kong) Ltd Contact: Paul Yong 18th Floor Man Yee Building 68 Des Voeux Road Central Central, Hong Kong Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong
MALAYSIA AllianceDBS Research Sdn Bhd Contact: Wong Ming Tek (128540 U) 19th Floor, Menara Multi-Purpose, Capital Square, 8 Jalan Munshi Abdullah 50100 Kuala Lumpur, Malaysia. Tel.: 603 2604 3333 Fax: 603 2604 3921 e-mail: [email protected]
SINGAPORE DBS Bank Ltd Contact: Janice Chua 12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel: 65 6878 8888 Fax: 65 65353 418 e-mail: [email protected] Company Regn. No. 196800306E
INDONESIA PT DBS Vickers Sekuritas (Indonesia) Contact: Maynard Priajaya Arif DBS Bank Tower Ciputra World 1, 32/F Jl. Prof. Dr. Satrio Kav. 3-5 Jakarta 12940, Indonesia Tel: 62 21 3003 4900 Fax: 6221 3003 4943 e-mail: [email protected]
THAILAND DBS Vickers Securities (Thailand) Co Ltd Contact: Chanpen Sirithanarattanakul 989 Siam Piwat Tower Building, 9th, 14th-15th Floor Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 857 7831 Fax: 66 2 658 1269 e-mail: [email protected] Company Regn. No 0105539127012 Securities and Exchange Commission, Thailand