Mitrabahtera Segara Sejati, Stronger volume deliveries going forward

Despite foreseeable fee re-negotiations by customers, we view that MBSS should be able to deliver stronger coal volumes in 2013 and 2014 as a compensation given by its long-term customers for lower fees. We lower our DCF based TP to IDR1,400 as we lower our 2013 and 2014 earnings by 5%/9%, yet maintain our BUY call as it still provides attractive upside. MBSS possesses minimum guaranteed volume protection and offers an attractive 2014 dividend yield of 6%.

Cut earnings by 5% and 9% for 2013-14
We cut 5% and 9% of our 2013-14 earnings as 9M13 earnings fell short to our expectation (67% of FY13 target). Although 9M13 total coal volume transported reached 57m tonnes (77% of FY13), the rates charged were lower than we expected. Thus, we cut our blended fee/tonne assumptions across its business segments by 10% and 18% as we predict that MBSS would move to shorter trip distance projects and would offer competitive/lower commanding rates to its customers amid unpleasant coal market condition.

We raise our aggregate coal volume assumption by 8% and 19% for 2013-14. It is worth noting that MBSS has been exposed to short trips from Kideco (a mark of synergy from Indika Group) as 9M13 revenue from Kideco reached USD14m (+176% y-o-y).

Sufficient backlog to secure earnings
9M13 backlog amounting to USD318m should provide a strong cushion for 2013 and 2014 revenue. Yet there is potential risk of several less favorable contract re-negotiations from miners in 2015. As MBSS is serving in a fragmented industry, risk of downward pressure on fee/tonne charged to its customers is highly imminent. Furthermore, MBSS has diversified clientele to serve which reduces its concentration and idle capacity risks.

Cheap valuation, premium dividend offering
With cash hoard of USD30m (as of 9M13), we suggest a reasonable 25% dividend payout for 2013 earnings, translating to an attractive 2014 dividend yield of 6%. Despite the earnings cut, MBSS is still currently trading at a very cheap valuation at 4x both for 2013-14 PER respectively. We lower our DCF based target price to IDR1,400 (from IDR1,500) as we cut our earnings assumptions for 2013 and 2014, yet we maintain our BUY call.