P H
Sep 24, 2017 09:14:35

Bukit Asam ($PTBA) – Assesing PLN’s Request On The Coal Price Formula

PLN is requesting for the coal selling price to domestic coal-fired power plants to be at costs plus a 15-25% margin formula amidst the recent strong coal prices. We view such a probability as small, as the Indonesian Government has allocated a higher budget for electricity subsidies in the 2018 proposed state budget. We maintain our assumptions that coal selling prices to domestic power plants would still be linked to international coal prices. Maintain BUY with an unchanged IDR17,400 TP (43% upside).


  • Cost plus margin formula? According to Detik, Perusahaan Listrik Negara’s (PLN) procurement director, Nickye Widyawati, has requested that coal prices for domestic power plants be determined via a cost-plus formula instead of using international prices as a benchmark. We view such a probability as small, considering the Government of Indonesia has allocated a sufficient state budget for electricity subsidies in its 2018 proposed state budget. Also, the decision maker on implementing the coal domestic price formula is the Ministry of Energy and Mineral Resources (MEMR), not PLN.
     
  • Sufficient budget for an electricity subsidy in the 2018 proposed state budget. The Indonesian Government has allocated a 15.2% higher electricity subsidy in its 2018 proposed budget, which would increase to IDR52.2trn (2017: IDR45.3trn). In 6M17, PLN obtained the Government’s electricity subsidy of IDR23.9trn, which turned PLN’s operating losses before subsidy of IDR6.3trn to an operating income after subsidy of IDR17.5trn. We think PLN’s 6M17 operational costs have already been exposed to the current high coal prices. Therefore, we think 2017 and 2018F’s allocated electricity subsidy from the Government should be sufficient to accomodate the current high coal prices.
     
  • Scenario analysis. PLN has requested for the coal selling price to domestic power plants be at a formula of costs plus margins of between 15% and 25%. Bukit Asam’s 1H17 gross margin was 37.3%. Around 57% of Bukit Asam’s total coal sales volume is to PLN. If MEMR decides to implement the coal selling price formula to domestic power plants at costs plus a 25% margin, then Bukit Asam’s FY18F-19F earnings could decrease by 18% and 15% respectively from our current earnings forecasts. If MEMR decides on the costs plus 15% margin formula, then Bukit Asam’s FY18F-19F earnings could decrease by 37% and 36% respectively from our current earnings forecasts (Figure 3). 
     
  • Maintain BUY. We maintain our assumptions that coal selling prices to domestic power plants would continue to be linked to international coal prices. We maintain an unchanged IDR17,400 TP as we view the possibility of PLN’s request to be granted as unlikely. Our TP implies FY17F-18F P/Es of 10.8x and 9.2x, respectively. Key risks are the Government’s decision to change the domestic coal price formula, a delay in expanding railway capacity, a significant drop in coal prices, weaker-than-expected coal demand and a strengthening IDR. (Hariyanto Wijaya, CFA, CPA, CMT)
     

hide
Handle
N/A
Handle