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Coal Sector Summary

Core Content

The document provides an analysis of the coal sector, focusing on Indonesia and global coal price trends, performance of key coal companies, and investment recommendations. It outlines the impact of global supply and demand dynamics, exchange rate fluctuations, and the potential for royalty hikes on the financials and valuations of coal companies.

Key Information

• Global Coal Supply and Demand:

  • Global thermal coal surplus is expected to rise significantly from 5m tonnes to 23m tonnes in 2013F, with continued surplus into 2014.
  • Seaborne demand is projected to increase from 905m tonnes in 2012 to 1,070m tonnes in 2015F.
  • Seaborne supply is also expected to grow, with Indonesia leading the increase.

• Coal Price Estimates:

  • Newcastle coal prices are revised downward by 5% to 10% for 2013F-2015F due to higher global thermal coal supply.
  • The revised price estimates are USD83/tonne, USD85/tonne, and USD89/tonne for 2013F, 2014F, and 2015F respectively.

• Indonesia's Coal Export:

  • Indonesia's coal exports increased by 15% YoY in the first five months of 2013 to 143m tonnes.
  • The company is expected to exceed the 2013F estimate of 331m tonnes.
  • The Rupiah depreciation is a double-edged sword, potentially increasing production for marginal producers but challenging the assumption of slowing supply growth.

• Demand Drivers:

  • China's thermal coal imports rose 8% YoY in 7M13 to 110m tonnes, with a strong increase in July (16m tonnes, +26% MoM).
  • India's demand is expected to continue to surge with 5.2GW of coal-fired power plants operational in 1H13 and 7.6GW scheduled for 2H13.
  • Demand is expected to remain strong as winter approaches, with hydropower output declining and power utilities restocking.

Investment Recommendations

• Bukit Asam (PTBA.IJ):

  • Rating: BUY
  • Target Price: IDR14,800
  • Valuation: Based on FY14F PBV of 3.4x
  • Performance: The stock has outperformed the broader index by 26% in the past month.
  • Earnings: Net profit is revised to IDR2,171b for FY13F and IDR2,333b for FY14F.
  • Production Growth: Expected to grow at 17% CAGR over the next two years, supported by increased railway capacity and new contracts with PLN and Pupuk Indonesia.
  • ROE: Expected to remain high at 25% for FY14F, much higher than Adaro and Harum.

• Adaro Energy (ADRO.IJ):

  • Rating: HOLD
  • Target Price: IDR950
  • Valuation: Based on FY14F PBV of 0.9x
  • Performance: The stock has a strong performance with a 40% 1-mth increase.
  • Earnings: Net profit is revised to USD248m for FY13F and USD301m for FY14F.
  • Concerns: Possible asset impairment due to falling coal prices and past acquisitions.
  • Royalty Impact: Higher royalties could increase cash costs for some subsidiaries.

Summary Table of Key Companies

Market Overview

• Stock Information:

  • Bukit Asam: Market Cap USD2,584m, 3-mth Avg Daily Turnover USD2.5m, Free float 35.0%, Government ownership 65.0%.
  • Adaro Energy: Market Cap USD2,591m, 3-mth Avg Daily Turnover USD4.7m, Free float 49.9%, PT Adaro Strategic Investments 43.9%.

• Key Indicators:

  • Bukit Asam: ROE 25.0%, NTA/shr IDR5,166, Interest cover 457x.
  • Adaro Energy: ROE 5.2%, NTA/shr IDR1,676, Interest cover 5.8x.

Conclusion

The coal sector is influenced by global supply and demand dynamics, exchange rate fluctuations, and potential royalty hikes. Bukit Asam is highlighted as the preferred play due to its strong production growth and high ROE, while Adaro Energy faces challenges from possible asset impairments and increased costs. The overall outlook remains neutral, with caution advised due to the depreciation of the Rupiah and the potential impact on coal prices.