Feb 27, 2017 11:04:05

Bukit Asam ($PTBA) - Peerless As The Only SOE Coal Mining Company

As the only SOE engaging in coal mining, Bukit Asam is the only operator that would benefit from synergy between SOEs as:

1. Its coal sales volume to other SOEs keeps increasing;
2. It has long-term coal domestic commitments to other SOEs.

We think the combination of higher coal sales volume and coal price in FY17F should fuel earnings – which we think consensus has not fully factored in, as our FY17F EPS is 35% higher vs the street. We re-initiate coverage with TP of IDR17,600 (58% upside), implying FY17F P/E of 11.4x.

¨ Beneficiary of higher coal selling prices. We think FY17 coal prices should reach around USD70-75.00/tonne (FY16 average: USD63.00), as China – the world’s biggest coal consumer and producer – has an interest in its coal mining companies generating profit in order to service their sizeable bank loans. As such, we assume an average FY17F coal price of USD73.00/tonne, and USD70.00/tonne from FY18F onwards. Higher coal price in FY17 onwards should increase Tambang Batubara Bukit Asam Persero’s (Bukit Asam) profitability and earnings, as its earnings are sensitive to changes in coal price (every 10% change in coal price should lead to a 16% change in EPS).

¨ The only coal company benefitting from SOE synergy. Bukit Asam is the only state-owned coal mining company in Indonesia. The Ministry of State Owned Enterprises (SOEs) pushes synergy between SOEs, which is crystallised in a decree guiding SOEs in the procuring of goods and services. The decree is one of a few key factors leading to Bukit Asam’s sizeable yearly SOE coal sales volume, together with other SOEs’ long-term coal commitment of around 574m tonnes.

¨ Domestic power plant joint ventures (JVs) to increase coal sales volume over the coming years. In addition to receiving return on investment in power plants, the JVs should increase Bukit Asam’s coal sales volume through the purchasing of the required coal from the latter.

¨ Expanding to overseas power plants to increase coal sales volume. Bukit Asam is planning to expand into overseas power plants via JVs in South-East Asia, especially to Vietnam and Myanmar. The two countries are expanding their electricity capacity, which means an increased need for coal. Bukit Asam’s corporate secretary informs that the company has signed an agreement to supply 1.5m tonnes of coal to Vietnam annually from 2018.

¨ Re-initiating coverage at BUY with IDR17,600 TP. Our DCF-derived TP implies FY17F P/E of 11.4x (-0.25SD from its 6-year mean P/E). Our FY17F EPS is 35% higher vs consensus, as we think consensus has not yet fully factored in an increase in coal sales volume and higher coal prices.

¨ Risks to our call include:
i. Delay in expanding its railway capacity;
ii. A significant drop in coal prices;
iii. Weaker-than-expected coal demand;
iv. A strengthening IDR. (Hariyanto Wijaya, CFA, CPA)