Resource Alam Indonesia, Hunt Down This Bargain

Reiterate our BUY call, TP: IDR5,150 , potential upside: 17.0%. We are maintaining our BUY call on the counter given the huge upside potential from its newly revised TP to reflect a higher coal price assumption. The investment theme for KKGI is its robust production growth profile as well as strong balance sheet. Currently, the counter is trading at undemanding multiples of 10.4x FY11f earnings compared to the industry average of 15.6x.

Closing 2010 on a resounding convincing note
KKGI’s FY2010 earnings soared 418% y-o-y to IDR166bn, which was in line with our estimate. Its revenue climbed 138% y-o-y to IDR969bn, driven by higher sales volume as well as average sales prices (ASP). 2010 coal sales volume totaled 2.2m tonnes, up 133% from 0.9m tonnes in 2009. In addition, ASP also edged up to USD48/tonne, 19% higher compared to the 2009 ASP of USD40/tonne.

On the contrary, its production cash cost declined by 16% y-o-y to USD24/tonne as the larger economies of scale gave rise to better production efficiency. However, we estimate a higher cash cost in 2011 due to a spiraling fuel price and a larger production volume.

Outlook for 2011 remains promising
With contribution from the newly producing blocks at its mine concession, we estimate that KKGI’s sales volume will jump 63% y-o-y to 3.5m tonnes in 2011. We also envisage the company’s ASP increasing by 17% y-o-y to USD56/tonne given that the stubbornly high global coal price benchmark will give it more leverage to garner higher contract prices.

Balance sheet position stays strong
At the end of 2010, the company had a total cash balance of IDR131bn. Assuming a dividend payout ratio of 40%, this will translate into a dividend per share of IDR66, which in turn provides a dividend yield of 2%.

Risks factors
The key risks to our call are in the form of production and pricing risks, as well as thin liquidity.