Tambang Batubara Bukit Asam, Focus on Future Projects
Reinstate coverage with Neutral call, TP: IDR21,150 , potential upside: -6.2%. We reinstate coverage on PTBA with a neutral call, with our TP implying a 17.1x-12.5x FY11-12f earnings. PTBA’s value hinges on its ability to execute its long-term projects that will rapidly increase the utilization of its vast coal reserves. But until more certainty emerges on these projects coming onstream, we believe the current share price fully reflects all the potential value the company has to offer.
Growth from existing capacity not overwhelming
Excluding any future projects, PBTA’s current capacity (railway transport capacity) will be gradually enhanced from 2011 to 2014 with a CAGR of 19%. However, with total coal reserves of 1.9bn tonnes, the company’s pace of growth is not optimal enough to monetize the huge reserves given that its current production only totals 12.5m tonnes. With coal price now at attractive levels, we feel that this is the best time to convert the company’s huge reserves into earnings.
2010 earnings drop not a precursor to 2011
PTBA’s 2010 earnings slipped 26% y-o-y on the back of lower ASP as a large portion of its 2010 sales was priced early in the year when coal price was still weak. Sales volume edged up by a slight 4% y-o-y to 13m tonnes but revenue still fell 12% y-o-y to IDR7.9trn. We expect ASP to improve in 2011 on stronger coal price, which will bolster the company’s earnings for 2011f-12f by 42%-36% respectively.
Still largely dependent on future projects
Indeed, constructing a new railway is intriguing as it will add a capacity of 7.5m-25m tonnes p.a. from year 1 to 4 from inception. This represents an enormous addition to PBTA’s current production of PTBA. However given its long term commercial operation target for 2014 and the fact that its current progress is still at the very early stages, the uncertainties still loom large. The premium valuation attached to PTBA depends largely on the progress of this project.
Risk factor
The key risk to our call is a significant update on the new railway project.
Future projects update
The projects in the pipeline are the new railway project (Tanjung Enim – Lampung) and Banjarsari mine-mouth coal-fired power plant (2x100MW).
Earnings growth projection of 42%-36% for 2011f-12f: In the next few years, PTBA’s growth will hinge only on its enhancement of the existing railway, from which we expect coal sales volume (excluding coal trading) to grow by 20% in 2011f and 10% in 2012f. We also projecting for ASP to grow by 10% from 2011f-12f, underpinned by the strong global price benchmark, which will definitely translate into better contract prices for PTBA, for both the domestic and export markets.
Consequently, we estimated that the company’s earnings will jump by 42% in 2011f and 36% in 2012f. PTBA’s role as the major supplier to the State Electricity Company (PLN) will be positive for the company as demand from PLN is expected to rise continuously as more coal-fired power plants come onstream. PLN itself estimates that its coal consumption will grow by 60% in 2011 to 58.6m tonnes and 28% in 2012 to 75.3m tonnes.
Valuations rich given the premium attached to future projects
We derive our target price for PTBA at IDR21,150, based on sum of the part valuation with assumed WACC of 10.9%. Our target will imply 17.1x 2011f and 12.5x 2012f earnings, which put the counter at the upper end of multiples among its peers despite its modest forecast sales volume growth in the next few years. This premium is due to the market pricing in the potential from its future projects, especially the new railway project, which will potentially start to make an impact beyond 2014.
