Resource Alam Indonesia, Taking a Big Leap Forward

Growth momentum play
After delivering another record number in terms of production volume in 2011, Resource Alam (KKGI) continues to offers the highest growth prospect in our universe of coal stocks. With 9M11 production already reaching 3.2m tonnes, it is on track to meet our 2011 full-year target of 4.3m tonnes (+91% y-o-y) and we are expecting a further acceleration to 5.8m tonnes (+35% y-o-y) for 2012,.

Average sales price (ASP) increase – another top-line catalyst
For 2011, the ASP grew by 22% y-o-y to USD58.5/tonne. Going into 2012, it will also get better due to improved coal index prices in 2011, compared to that as at end-2010, and a better mix of coal caloric value (CV) that KKGI is expected to produce in 2012. Having said that, we are expecting the ASP to grow by 13% y-o-y to USD66/tonne. The composition of the company’s higher CV coal is expected to increase to 10.5% of total volume in 2012 compared 3.4% in 2011.

Another leap in profitability
Underpinned by the robust growth in both volume and ASP, KKGI’s revenue is expected to increases by 50% y-o-y in 2012 to IDR3,380bn, while its net profit is anticipated to edge up by 58% y-o-y to IDR768bn. Profit margins will continue to stay solid considering the strategic location of the company’s mine, as this ensures an efficient coal-mining process, which can translate into competitive production in terms of cash cost. For 2012, we expect the cash cost to increase only slightly by 7% to USD29/tonne.

More upcoming catalysts
KKGI is currently in the process of reviewing its coal reserves and resource figures to comply with the JORC standard. The resource number is expected to be announced in late-Dec 2012, while the reserve figure sometime in Jan 2013. This will give more assurance to investors with regards to the company’s status as a going concern and mine lifespan. As of Nov 2011, KKGI has been incorporated into the MSCI Global Small Cap indices.

Our top pick for the sector
KKGI currently trades at undemanding multiples of 7.3x FY12f earnings despite its robust earnings growth potential. As such, we have a BUY recommendation for the counter with a Target Price of IDR7,500 that implies a 9.7x FY12f earnings. KKGI is our top pick for the coal sector in light of its strong volume growth, healthy balance sheet and promising short-term catalysts.