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ABM Investama Cushion Play

By administrator | August 3, 2012 | Mining.

Emerging new core business. Currently, the group’s earnings are predominantly contributed by its subsidiaries, Cipta Kridatama (~43% earnings contribution – contract mining) and Sumberdaya Sewatama (~16% – power solutions). However, in the long run, we expect ABMM’s subsidiary, Reswara (currently contributing only 9% to group earnings), to be the backbone of ABMM’s consolidated business. We believe that Reswara’s coal mining business will contribute ~40% to the group’s earnings in the long term. We expect ABMM’s EBITDA to grow at a CAGR of 52% from 2011-2014, while its net profit is anticipated to grow at a CAGR of 72% over the same period, driven by the robust growth of its 3 key businesses.

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Robust coal production growth. ABMM has two IUP coal mines – MDB (70% owned; Aceh) and TIA (100%-owned; South Kalimantan). Its reserves and resources are 221m tonnes and 561m tonnes respectively. We expect its coal production to reach 5.5m tonnes, 12.5m tonnes and 15.0m tonnes for 2012, 2013 and 2014 respectively, largely driven by the production from its MDB mine. Despite the coal price downturn in the thermal coal market, ABMM has secured 4.5m tonnes of coal production in 5M12, accounting for 82% of our FY12 full year production target of 5.5m tonnes. Most of its production comes from its TIA mine which categorized as a low rank coal. Despite strong demand progress, the unpleasant signal comes from the depressing benchmark coal price. This should be a main concern given that ABMM’s coal asset are low rank coals, thus a tight margin depression imminent. However, given that ABMM’s defensive stance with 80% quarterly fixed proportion, we believe this year’s earnings from its coal business should be good. Despite ABMM’s relatively low rated coal quality, we expect ABMM to enjoy lower cash cost going forward as it will be able to derive economies-of-scale benefits from ramping up its production and completing its conveyor belt facility for its MDB site in 2013. Mines site proximity to port (25km for TIA & 12km for MDB) and low strip ratio of 5x and 2.5x, respectively, should give advantage to run at lower mining cost.

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Mining contracting and electricity rental business to spur ahead. ABMM’s subsidiary (100%-owned), Cipta Kridatama, is the top 5 contract mining service in Indonesia in terms of overburden removal. ABMM inked a 5-year USD300m contract with Riau Baraharum, which will give the former more stable and steady revenue streams for the next 5 years. We expect overburden removal volume to grow at a CAGR of 20% from 2011-2014. Sumberdaya Sewatama, which is a 100%-owned subsidiary by ABMM, claims to have a 42% market share in the temporary power industry, with Perusahaan Listrik Negara (PLN) being its main customer. We believe the temporary power business will complement the country’s relatively immature power grid, with 80m people (~1/3 of the total population, ~66% electrification ratio) having no access to electricity.

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Valuation. ABMM is currently trading at 13x and 7x 2012-13 PER, a 25% premium and a 29% discount to the sector. We derive our target price of IDR3,600 based on a 45% discount to an implied target 2013 PER of 12x. The discount is applied as to factor in execution risk especially on its strong coal production forecast going forward.

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