Resource Alam Indonesia, In Search of New Catalysts
KKGI reported a net profit of IDR450bn for FY11, representing a 19% q-o-q decline but a 171% y-o-y increase. This figure undershot our and consensus expectations, largely due to a slight drop in sales volume and accrual expenses incurred in 4Q. Overall, the top line performance is satisfactory but in view of the lack of short-term catalysts for the stock and sector in general, we downgrade our call to NEUTRAL while maintaining our Target Price.
Flat operational performance impact earnings
On a q-o-q basis, total production and sales volume declined by 11% and 7% respectively but the average selling price (ASP) and production cash cost were relatively flat. For FY11, total production reached 4.2m tonnes while sales volume hit 4.1m tonnes, both representing a y-o-y increase of 88%. KKGI also incurred accrual expenses for its floating crane services in Jan 2012 and consultant fees related to its JORC survey, both of which contributed to higher operating expenses.
Reclassification of expenses leads to production cost changes
As part of efforts to adjust to new financial reporting standards, KKGI reclassified royalty and infrastructure compensation expenses under cost of goods sold instead of operating expense starting from 2011, which explains the surge in cost of goods sold. While this no impact on the actual bottom line, we are compelled to revise our forecasts accordingly.
ASP and volume improvement support revenue growth
Apart from posting a significant increase in volume, KKGI was also able to boost its revenue by 128% y-o-y to IDR2.1trn. This was largely propelled by a robust 22% improvement in the ASP to USD58.5/tonne, with the production cash cost increasing only by 14% to USD26.9/tonne.
Limited upside prompts downgrade
Despite the healthy growth in 2011, we believe that the counter and overall sector lack potential rerating catalysts in the short term. In view of the limited upside potential, we downgrade our call to NEUTRAL while maintaining our Target Price.
