Indonesia Coal

Alert: Conference Takeaways – 2Q11 Production On trackWe met three coal companies (ADRO, ITMG and BUMI) at our Indonesia Investor Conference in Jakarta. Adaro remains our top sector pick as the company’s production
could surprise on the upside as the company appears on track to meet our above consensus production estimates in 2011.

The three companies indicated that their 2Q11 production is on track with their internal target and intimated that production in the quarter would be higher than that in 1Q11 due to better weather conditions. Based on this and factoring in the 1Q11 data, we think Adaro is best placed to meet our production expectation of 48m tons for 2011 (at the high end of the company’s guidance of 46-48m tons). In contrast, ITMG could slightly miss our estimate given their weak 1Q11 production and the company’s indication that their mine areas were still relatively wet in April and May. However, we expect the potential slight shortfall could be compensated by the production ramp-up in 3Q11 on dry weather.

Adaro (Buy/Medium Risk), announced that its consortium with J-Power and Itochu has received a Letter of Intent for its IPP project. The 2 x 1GW coal-fired power plants (to be operational in August 2016 and February 2017) will utilize Indonesian subbituminous coal as fuel as the boiler would be built using ultra-supercritical technology. The power plants would be a captive market for Adaro’s Wara coal and is expected to consume 6-7m tons of coal annually. This should mitigate concerns over margin dilution from the IPP business, in our opinion.
Adaro expects to close the planned related party acquisition of 3-4 coal mines in 2H11. While Adaro declined to provide any details for the acquisition, the company stressed that the potential consideration for the acquisition won’t exceed 25% of its equity.

Indo Tambangraya (Buy/Low Risk). Management stressed that the company continues to be on the lookout for an inorganic growth target. ITMG was recently close to wrapping up a deal as the company had agreed on the pricing, but finally decided to pull out as the seller didn’t agree on an indemnity clause. Management also shared that the company might venture into the power business in the longer term as they are of the view that it is a strategic fit for their coal business.

Bumi Resources (Hold/High Risk). Management reiterates the company is on track to increase its capacity to 100m tons by early 2013. The company expects production in 2012 to increase 15% from 66m tons in 2011. Bumi is also keen to explore a possibility of acquiring met coal assets down the road.

Adaro Energy
(ADRO.JK; Rp2,375; 1M)
Valuation
Our target price for Adaro Energy of Rp3,550 is based on a 2011E EV/EBITDA of 8.0x.
This is based on 1 standard deviation above the stock's mean since its listing which we think is justified given the current coal price upcycle. We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers. The discount to the global average is warranted, in our view, given Indonesia's higher risks.

Risks
We rate Adaro Medium Risk based on our quantitative risk rating system, which tracks
260-day historical share price volatility. Risks that could prevent the shares from
reaching our target price include: a) coal price volatility; b) fluctuating crude oil prices; c) poor weather conditions that might hamper coal production.

Indo Tambang Raya Megah
(ITMG.JK; Rp45,450; 1L)
Valuation
Our target price for ITM of Rp58,000 is based on 2011E EV/EBITDA of 8.0x. This is
based on 1 standard deviation above the stock's mean since its listing in December
2007 which we think is justified given the current coal price upcycle. We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers. The discount to the global average is warranted, in our view, given Indonesia's higher risks.

Risks
We rate ITM Low Risk, based on our quantitative risk rating system, which tracks 260-
day historical share price volatility. We believe Low Risk is appropriate given the
company's sizable cash and relatively high dividend payout. Risks that could prevent
the shares from reaching our target price include: a) coal price volatility; b) fluctuating crude oil prices; c) poor weather conditions that might hamper coal production.

Bumi Resources
(BUMI.JK; Rp3,200; 2H)
Valuation
Our target price for Bumi of Rp4,200 is set at 4.8x 2012E EV/EBITDA. This is based on
a 40% discount to Adaro's target multiple of 8x. We use EV/EBITDA as our valuation
metric to avoid distortions caused by differences in tax rates between Indonesian
companies and their regional peers. We apply the 40% discount for Bumi to reflect its
higher risk profile and high gearing.

Risks
We rate Bumi Resources High Risk, as suggested by our volatility-based quants risk
rating system. Risks that could hamper the share price from reaching our target price
include: 1) lower coal price and production realization; 2) further aggressive gearing up that could substantially raise Bumi's risk profile; and 3) corporate actions that could be perceived as detrimental to minority shareholders' interests. Upside risks that could impede the stock from achieving our target price include: 1) better than expected production and coal price realization; and 2) faster than expected deleveraging.

source: Citi Asia Pacific dated 22 June 2011