Harum Energy A Glowing Future

Reiterating our Buy call, TP: IDR10,450, potential upside: 14.2%
We are reiterating our Buy recommendation on HRUM while revising upwards our target price to incorporate a higher coal price assumption. We are raising our FY2011f-12f earnings forecasts by 9%-27% on adjusting our ASP assumptions. Our end-2011 DCF target price is IDR10,450, based on 17.4x-10.8x 2011f-12f earnings. The counter is currently trading at a 15.3x 2011f earnings compared to the industry’s average 15.6x.

Unmatched volume growth the key catalyst
We believe that the company’s 27% y-o-y production volume growth in 2010 will continue well into in the coming years. We estimate that production volume will surge by 42%-38% for FY2011f and FY2012f to 10.5m tonnes and 14.5m tonnes respectively. Note that HRUM’s current annual production capacity of 15m tonnes provides more than adequate room for it to achieve the projected growth.

Profitability set to soar
In tandem with the rising tonnage of coal, the company’s ASP for 2011 coal contract delivery will also be much higher as it will be benchmarked on the stubbornly high global coal price. Having said that, we are projecting for ASP to rise by 16%-11% for 2011f-12f. Accordingly, HRUM’s net profit will soar by 217%-62% for the 2011f-12f period.

Precursor to a glowing future
HRUM FY2010 net earnings were in line with our estimates at IDR824bn. Although the growth compared to 2009 was relatively modest at 7%, it was largely due to the strengthening of the IDR against USD by 13% during the year. HRUM actually generates its revenue in USD but reports its financials in IDR. Meanwhile, its balance sheet remains robust with a net cash position and total cash of IDR1trn (29% of its total assets) as of December 2010.

Risk factors
The key risks to our call are volatility in coal prices, weather conditions and partnership risks.