Petrosea Locking in Steady Income Streams

Company background
Petrosea (PTRO) is one of Indonesia’s leading coal mining contractors, with a 40-year track record. Ranked sixth in terms of overburden removal, PTRO lays claim to being the only local company providing complete pit-to-port mining solutions. The company is 69.8%-owned by Indonesia-listed energy company, Indika Energy (INDY). Its mining contract business accounted for 88% of revenue in 2011 (versus 52% in 2008), with a strong backlog worth USD1.3bn (+76% y-o-y) from affiliated clients such as Bayan Resources, Kideco and Santan Batubara.

So far this month, PTRO has pocketed some USD2bn worth of backlog secured up to 2018. Elsewhere, the company enlarged its footprint after it purchased a 50% equity interest in the Santan Batubara coal mine, with another listed coal miner, Harum Energy (HRUM), holding the remaining 50%.

Strong overburden removal growth
On 26 March 2012, PTRO signed an agreement with Gunungbayan Pratamacoal, a subsidiary of Bayan Resources (BYAN), to extend the mining contract, expiring this year, to Dec 2017. The new contract, valued at USD567m, accounts for 44% of PTRO’s 2011 cumulative backlog. It is worth noting that the company’s overburden removal volume expanded at a CAGR of 30% from 2008 to 2011.

PTRO expects 2012 overburden removal to have a similar growth rate like in 2011. As PTRO plans to add up to 15 fleet sets (comprising 1 excavator, 5 to 8 dump trucks and other auxiliary equipment) this year, it is expected to have 44 such sets by the end of this year.

Strong synergy with Santan Batubara
PTRO derives two streams of income from its Santan Batubara (SB) coal mine joint venture (JV) with HRUM. It obtains fees from providing mining contract services to the JV as well as earnings contribution from its investment in the venture. SB plans to ramp up production to 2.7m tonnes (+59% y-o-y) this year, from 1.7m tonnes in 2011. Note that in 2011, PTRO received an earnings contribution of USD11m (which is significant relative to the group’s earnings) from its investment in SB.

Dividend and capex
PTRO plans to distribute USD21m, or 40% of its profit, as dividend this year, which will translate into an attractive dividend yield of 4.3% for FY12. It has set aside USD240m as capex for 2012, which will largely go towards fleet expansion. This amount will be financed by bank loans (30%) and funds from its parent company, INDY (30%), with the remaining portion comprising internal cash.

Valuation
We expect its 2012 bottomline to expand by 33% y-o-y, translating to a relatively undemanding 2012 PER of 6.9x based on the current share price.