Resource Alam Indonesia, A Letdown Performance in 3Q

KKGI’s earnings for 3Q12 tumbled by 42% q-o-q to IDR44bn and sunk 37% y-o-y for the 9M12 period to IDR218bn, falling below our estimates. The rising production cost compressed its earnings, while its ASP remained under pressure. Following our coal price assumption revision, we also cut down KKGI’s earnings forecast for FY12f and FY13f by 30% and 34% respectively, thereby lowering our fair value (FV) to IDR3,000 implying 8x FY13f PE. We also downgraded the stock to a NEUTRAL.

Weak demand prompts a reduction in volume
KKGI’s sales volume for 3Q12 jumped 23% q-o-q to 1.1m tonnes, but decreased by 4% y-o-y for 9M12 to 3.1m tonnes. A combination of weak demand and the unfavourable price of coal caused the company to scale back its sales volume. Thus, we expect FY12f’s volume to reach only 4.1m tonnes, 5% lower than our previous estimate.

Price outlook still shaky
KKGI’s ASP decreased by 16% q-o-q and 4% y-o-y in 3Q12 as a result of weakening global coal prices. The outlook for the price of coal remains challenging for the near future, and this has triggered us to slash our ASP assumption for FY12f and FY13f by 11% and 12% respectively.

Revising down earnings estimates
Due to our downward revision of the price assumption for coal, we also slashed down our earnings forecast for KKGI by 30% for FY12f and 34% FY13f.

Downgrade to NEUTRAL, and a cut to the FV
We downgraded our call on KKGI to a NEUTRAL, underpinned by limited upside potential and a lack of any positive catalysts for the short term. Note however that KKGI’s strength lies in its relatively mid-sized production volume, thus it will enjoy greater positive exposure once the market experiences a turnaround. We cut our FV to IDR3,000, based on target PE of 8.0x in FY13f.