Bukit Asam, Profits Soften Amid Tough Conditions

PTBA’s 3Q12 results came in lower than our estimates as rising production costs and declining ASP dragged down earnings. The quarter’s net profit reached IDR653bn, down 3% q-o-q and 6% y-o-y, making up only 65% of our full-year estimates. In view of recent weak global coal prices, we are trimming our coal price assumptions for FY12 and FY13 by 10%. Consequently, we are also cutting our earnings forecasts and lower our TP to IDR19,900, while retaining our BUY call.

Weakening coal price takes its toll
The global coal price benchmark in the first two months of 3Q dipped 5% vs that in 2Q, and after a 20% q-o-q plunge in 2Q alone. As a result, PTBA’s ASP suffered a 7% q-o-q drop to IDR730k/tonne despite most of its sales already having contracted in 1Q12. We believe that ASP will remain under pressure going forward until coal price recovers.

Increase in sales accompanied by higher costs
In 3Q12, PTBA’s sales volume reached 4m tonnes, representing a jump of 14% q-o-q and 15% y-o-y, bringing the 9M12 total to 11.4m tonnes. However, as the company’s ASP actually declined, its revenue only increased by 6% q-o-q and 12% y-o-y while production costs accelerated by 12% q-o-q and 27% y-o-y.

Better market conditions seen
For much of 2012, the thermal coal market suffered a sharp decline in prices due to excess supply, moderate weather conditions that spurred production even as demand slowed down, cyclical weaknesses and a lower competing power fuel price in the US (natural gas). However, going forward, we believe that exports from the US and elsewhere will subside. This, combined with resilient demand in Asia, will not only limit the downside but may eventually set the stage for a tighter coal market over the next two to three years, thereby boosting coal prices. Consequently, we are revising our coal price assumption to USD94 per tonne in FY12f, USD100/tonne for FY13f and USD110/tonne for FY14f.

TP lower, but still a BUY
In tandem with our lower coal price assumption, we are trimming our earnings estimates for PTBA by 5%, 14% and 11% for FY12-14f respectively. This also leads to a lower target price (TP) of IDR19,900, based on DCF, assuming a WACC of 10.9% and implied PE of 14.0x-13.1x FY12-13f. We continue to favour PTBA given the company’s dominance in the domestic market and future potential projects. Presently, the coal sector is trading at 9.9x-10.1x FY12-13f PEs.