PT Bukit Asam (Persero) Tbk (PTBA) is an Indonesia-based coal mining company. Its scope of operation includes general surveying, exploration, excavation and processing; the Company also engagesin coal briquette production and has three production units located in Tanjung Enim, Gresik and Natar. In addition, PTBA offers logistical, support and consulting services related to the coal mining industry.
- PTBA still offers attractive short-term growth in comparison with other Indonesian coal miners. The company is expected to increase production at a CAGR of 16% over 2012-16.
- The PT KA rail expansion project is on track and will increase rail-transport capacity to 18.5mt by 2013(an impressive 21% YOY growth) and to 22.7mt from 2014 onwards from 15.6mt in 2012.
- The company is currently building more than 2GW of mine-mouth power plants, which could consume as much as 15mt of coal, saving transportation costs and providing captive demand. The cost saving will add IDR 2337/share or 14% to the current share price.
- PTBA is a defensive investment and will continue to outperform its peers in the current coal price environment, given its superior production, higher margins and stronger balance sheet.TheCompany is expected to generate better than industry EBITDA margins of 27% in 2013 because of low strip ratio and cost effective rail transport vis-avis its peers.
A. The ASEAN Coal market
The market remains pessimistic despite robust demand for seaborne thermal coal as prices remain sluggish due to oversupply. Prices are expected to remain range bound in 2013 before starting to recover in 2014. Any price correction will be healthy for the industry, asthere may be some wholesale production cuts if coal prices dip below USD 80/t.
- Seaborne thermal coal markets remain well supplied as marginal producers in Australia, although currently incurring cash losses are reluctant to cut production. Moreover, counter-intuitively, Indonesian coal producers intend to grow production in 2013 for reasons such as (a) debt servicing; (b) fear of losing market share and customers; and (c) capex commitments made in the past two years. 2013 could be the last year of significant capacity additions in this cycle as companies have cut their capex to near zero in the past six months. Contract mining companies have no plans to increase their fleet size.
- Many Indonesia coal producers have made reducing cash expenditure their top priority for 2013, primarily by reducing strip ratios. The sustained reduction of strip ratios could lead to production cutbacks or to an increase in average future strip ratios.
- China’s proposed import ban on low-grade coal will have little impact on Indonesian coal majors. Indonesia coal (low grade but with low ash and sulphur) could be blended with Australian (high grade, but containing high ash) and US coal(high grade, but with high sulphur) to benefit the regions. Currently, IPPs and coal traders primarily do this blending.
- Coal equities are under-owned. Bumi, Harum and Banpu are expected to underperform; and Adaro and Indika to be in-line. Bukit Asam(PTBA) is likely to outperform its peers because of its low production cost and strong balance sheet.
- Coal miners indicate that customers are asking for an average 5% YOY increase in volumes in 2013. India and china have been the most active buyers in the seaborne market so far this year.
- The stock is trading close to its 52week low and now is a good time to enter the investment. A 12 month price target of IDR 18000 is achievable, however investors have to be patient as the fall in thermal coal price might make it take 3-6 months to achieve the target price.
- The company has managed to reduce its cash conversion cycle form 111days in 2005 to 67 in 2012, and is maintaining a healthy quick ratio of 4 times and leverage of 1.4 times over the last six years.
- Italso achieved average an annual growth rate of 40% in operating income and 24.53% in sales over the last five years.
- The P/E ratio is close to that of the sector and industry average, however beta is a little lower (1.29 compared to the industry’s 1.43).
- The company pays a regular dividend, making it a good investment to consider for an income portfolio.
- The high 5yr ROE and ROA in comparison with industry and sector average demonstrates strong managerial capabilities.
By Marc Djandji
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