20140213-Maybank_KERPL-Indonesia_Coal_40页_1mb

Indonesia Coal Sector Summary

Core Content

The Indonesia coal sector is currently evaluated at a Neutral stance due to the absence of strong macroeconomic catalysts. The sector's valuations are at an eight-year mean, with ADRO being the top pick among the listed companies.

Main Views

• Coal prices are expected to remain relatively flat in 2014, with an average of USD85/ton, a +1.3% YoY increase from 2013.
• Negative earnings growth is anticipated for 2014F, but at a lower pace due to reduced coal price volatility.
• Regulatory changes in China and Indonesia are considered potential wild cards that could influence coal prices.

Key Risks

• Coal-price volatility and regulatory changes are the two biggest risks to the sector.
• Royalty increases for IUP-based companies (Mining Business License) are likely, which could negatively impact earnings for companies like PTBA.
• DMO implementation in Indonesia is expected to reduce exports, but the effectiveness of this policy remains uncertain.

Valuations

Sector Valuations (2014F)

• PER (Price-to-Earnings Ratio): 12.2x (8.9% discount to 8-year average of 13.3x)
• EV/EBITDA: 7.1x (4.4% premium to 8-year average of 6.8x)

Company Valuations

Regional Comparison

• Indonesia's 2014F PER is 12.2x, which is more attractive than China's 14.2x and India's 10.2x.
• Indonesia's ROAE (Return on Average Equity) is 17.0%, significantly higher than China's 7.5%.
• The dividend yield for Indonesia coal companies is 4.5%, which is more attractive than China's 3.0% and India's 7.0%.

Investment Recommendations

• ADRO is the top pick due to its production-growth profile, healthy balance sheet, competitive cost structure, low regulatory risk exposure, and fair valuations.
• PTBA is also recommended as a buy, based on its large reserve base, clean balance sheet, ramp-up in railway volume, and strong position in the domestic market.
• BUMI and ITMG are held due to uncertain balance sheet risks and short mine life, respectively.

Impact of Regulatory Changes

Royalty Hike

• Potential royalty increase to 10% for IUP-based companies could reduce earnings by 25% for PTBA.
• ADRO, ITMG, and BUMI would be less affected as they are primarily CCoW-based (Coal Contract of Work) and thus not subject to the same royalty increase.

DMO (Domestic Market Obligation)

• DMO is expected to increase by 28.6% YoY to 95.6m tons.
• This could lead to a reduction in exports, but implementation challenges may limit its impact.
• PLN, the state power company, is the largest buyer of DMO, accounting for 78.7m tons or 82.4% of total DMO.

Coal Price Break-Even Points

• Cash break-even coal price for ADRO, ITMG, and PTBA is USD62-67/ton.
• Current coal prices (~USD75-80/ton) are above this threshold, ensuring profitability for these companies.

Industry Implications

• A China coal import ban could significantly impact low CV coal producers like ADRO, but higher quality coal producers (BUMI, ITMG, PTBA) may be less affected.
• Consolidation in the Indonesian coal industry may occur due to pricing pressure, which could take 2-3 years to materialize.
• ICMA (Indonesia Coal Mining Association) opposes the royalty hike and proposes a price threshold of USD100/ton before any increase is implemented.

Summary of Key Factors

• Coal prices are expected to remain flat in 2014.
• Regulatory changes (e.g., royalty hikes, DMO, import bans) could impact sector dynamics.
• ADRO and PTBA are recommended as buys due to their strong fundamentals and resilience to price volatility.
• BUMI and ITMG are held due to balance sheet concerns and mine life limitations.
• Royalty changes and DMO implementation are key wild cards affecting the sector's profitability and market direction.