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Apr 11, 2017 15:05:35

Despite the recent strong share price outperformance, we believe Delta Dunia’s expected sharp improvement in financial performance has yet to be fully reflected in consensus numbers and its share price. We reinitiate coverage with a BUY call and DCF-derived TP of IDR1,500 (40% upside), which implies 2017F P/E of 10.1X on our projections. Our 2017F EPS is 21.8% higher than consensus. We like the stock given its undemanding valuations (2017F EV/EBITDA of 4x vs United Tractors’ 7.5x), improving ROAE, and strong projected 2017F earnings growth of 142% YoY.

  • 2017F earnings projected to surge 142% YoY but yet to be reflected in consensus. Delta Dunia Makmur ($DOID) is not well covered (consensus numbers reflect only one local broker) – this suggests that the projected sharp improvements in its 2017F operational and financial performance have yet to be reflected in consensus and its share price. We expect a sharp turnaround in Delta Dunia’s operational and financial performance in 2017F, as we project a 142% YoY increase in 2017F earnings on the back of a sizable increase in mining contracting volumes, and improvements in its coal mining contracting fees. Our 2017F EPS is currently 21.8% higher than consensus.
     
  • Spike in 2017F mining contracting volume. Delta Dunia owns 100% o fPT Bukit Makmur Mandiri Utama (Bukit Makmur), the second largest coal mining services contractor in Indonesia in terms of volume. We estimate its 2017F overburden removal volume and coal production to grow by 19.1% and 24.8% respectively. Volume growth in 2017F would mostly come from a ramp-up in coal production at Berau Coal ($BRAU), Sungai Danau Jaya (a subsidiary of Geo Energy Group, and Tadjahan Antang Mineral.
     
  • Stabilising coal price above USD70/tonne favours its mining fees. Most of Bukit Makmur’s mining contracting fees have three tiers, which are reviewed every month and determined based on the rolling average for coal prices over the last three months. Coal mining fees in the first tier (when average coal price <USD60/tonne) is 6% and 12% lower than second tier (when coal price is between USD65-75/tonne) and third tier (when coal price is >USD75/tonne) respectively. Due to weak coal prices, Delta Dunia’s mining fees were in the first tier (the cheapest) during 8M16. Its mining contracting fees moved up to the second tier in Aug 2016 and the third tier (the highest) since Sep 2016. As we project coal prices to sustain above USD70/tonne, we expect Delta Dunia to continue to enjoy higher profit margins from higher mining fees.
     
  • Reinitiating coverage with BUY and TP of IDR1,500. We reinitiate coverage on Delta Dunia with BUY as we think its upcoming sizable improvements in operational and financial performance are still not fully reflected in its share price. Our TP of IDR1,500 is derived using DCF (WACC: 9.8%, TG: 1%), and implies 2017F P/E of 10.1x and EV/EBITDA of 5x – this compares with United Tractors’ ($UNTR) FY17F P/E of 16.7x and EV/EBITDA of 7.5x. Near-term catalyst is a potential sharp upgrade in consensus earnings. Key risks to our call include a slump in coal prices. (Hariyanto Wijaya, CFA, CPA)
     
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