Resource Alam Indonesia, Facing Strong Headwinds

Bad weather disrupts production
In 1Q12, coal production volume only reached 0.9m tonnes (-11% q-o-q), which leaves KKGI with a lot of catching up to do to achieve our previous full-year estimate of 6m tonnese. Hence, we are lowering our volume assumption by 8% and 13% for FY12 and FY13 each respectively to 5.5m tonnes and 7m tonnes.

ASP declines slightly due to weak global prices
The recent downturn in coal prices has dragged KKGI’s current ASP down by 5% q-o-q. After lowering our coal price assumption by 11% and 8% for FY12 and FY13 to USD115/tonne and USD120/tonne respectively, we have also lowered our ASP assumption for KKGI by 4% and 1% for FY12 and FY13 respectively.

Performance should pick up in the next quarters
Since our channel checks indicate that the weather condition has improved in April 2012, we believe KKGI’s coal production will start to pick up in 2Q and 3Q. The ASP also should also see an uptick with production from new sub-blocks that have higher CV coal coming on-stream.

Limited downside prompts upgrade
Despite our downward earnings estimate adjustment, we believe all the negatives have already been priced in since the share price has corrected. KKGI still remains one of the top picks in our coal universe, given its attractive volume growth and untapped potential. Thus, we are upgrading our call to BUY with a new TP of IDR7,300, which implies 9.4x FY12 earnings.