Harum Energy, Unleashing Latent Potential

Buy initiation, target price Rp9,900
Our Buy recommendation is premised on HRUM’s i) robust production growth, ii) huge untapped coal resources potential, iii) strong balance sheet, and iv) attractive coal market structure. Our end-2011 DCF target price is Rp9,900, which implies 13x 2012F earnings. Its share price catalysts may include: i) More reserves and resources upgrades, ii) higher coal prices, iii) acquisition of new coal concessions.

Robust growth
On the back of huge demand for thermal coal and adequate installed processing capacity, we estimate that HRUM’s coal production will grow by 38%-40% from 2011-2012. The company, which has production capacity of 15m tonnes with a 2010 production target of 7.4m tonnes, still provides an adequate level of idle capacity.

Huge unexplored area
HRUM has a mine concession area covering 47,196ha, of which only c. 3,000ha (6%) is exploited. Consequently, despite there being assurance of how many tonnes of coal resources can be generated from the un-exploited area, the upside potential is undeniably still mind-boggling. At present, the company has total coal reserves and resources of 123m tonnes and 487m tonnes respectively.

Strong balance sheet
With the IPO proceed of Rp1tn taken into accounts, HRUM will be in net cash position of Rp758bn that provides more than enough funding capability for possible acquisitions of new mine concessions or generous dividend payment. The company has no significant capital expenditure requirement within the next few years as most key infrastructures required already in place.

Attractive demand-supply dynamics
Indonesia’s demand for coal is expected to increase significantly on the back of the rapid development of coal fired power plants to supply sorely needed electricity. As Indonesia is the world’s second biggest coal producer, any reduction of supply from the country will definitely have an impact on the market, but this will be positive for the price.

Initiate with a BUY
HRUM is one of our top picks in the coal sector for its strong growth profile and healthy financials. Our target price of Rp9,900 was derived using DCF valuation, with an assumed WACC of 10.3%, implying a 2012F PE ratio of 13x.