P H
Oct 23, 2017 07:31:39

Bukit Asam ($PTBA)’s strong 3Q17 net profit is above consensus expectations. We think the strong earnings should continue, as high coal prices are likely to be sustained. Based on our discussion with its CFO, the firm is confident that PLN’s request to use a cost-plus margin formula for determining the coal selling price to domestic power plants is unlikely to be implemented. We maintain our assumptions and reiterate BUY with an unchanged IDR17,400 TP (58% upside). Bukit Asam’s FY17F-18F P/Es of 6.8x and 5.8x respectively are the cheapest among our coal universe.



  • Management is confident that the cost-plus margin formula is unlikely to be implemented. Based on our discussion with Bukit Asam’s chief financial officer Mr Orias Petrus Moedak, he is confident that Perusahaan Listrik Negara’s (PLN) request to use a cost-plus margin in determining the coal selling price to domestic coal power plants is unlikely to happen. 
      

  • Using conservative accounting to record coal selling prices to PLN. Bukit Asam booked revenue from selling coal to PLN in 9M17 using the ASP the latter requested for in negotiations. These negotiations are still ongoing.
     
    If the final agreed selling price with PLN in the yet-to-be-signed agreement uses 4Q16 ASP (as per the former agreement), there should be a positive surprise. This is because Bukit Asam would record a higher selling price and make a retroactive adjustment to its revenue from PLN since the start of 2017. 
      
  • Banko Tengah (Sumsel 8) power plant should commence its commercial operation date (COD) in 2021. On 19 Oct, Bukit Asam subsidiary PT Huadian Bukit Asam Power and PLN signed an amendment to their power purchase agreement (PPA) for the 2x620MW Banko Tengah (Sumsel 8) mine mouth coal-fired power plant. The COD of this plant is scheduled for 2021. 
     
    The Sumsel 8 power plant is slated to consume 5.1m tonnes of coal pa, 100% of which would come from Bukit Asam’s coal mine. This should increase its coal sales by 5.1m tonnes (FY17F: 23.1m tonnes) from 2021 onwards.
      
  • 3Q17 earnings are above consensus expectations (9M17: ~77% and ~82% of our and street’s estimates). Bukit Asam booked strong 3Q17 earnings of IDR902bn (+165% YoY, +5.7% QoQ) on the back of higher revenue and gross margins (3Q17: 40%, 2Q17: 37%, 3Q16: 24%). This was partly contributed by a lower stripping ratio in 3Q17.
     
  • Reiterate BUY with an unchanged IDR17,400 TP. We maintain our assumptions and reiterate our BUY call on this counter with an unchanged DCF-derived IDR17,400 TP. This implies P/Es on our FY17F-18F EPS of 10.8x and 9.2x respectively.
     
    Currently, Bukit Asam is trading at FY17F-18F P/Es of 6.8x and 5.8x, respectively, making it the cheapest coal stock in our universe. 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)
      

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