ITMG, Target price Rp46,000

ITM
Steadying the ship

We expect a strong 4Q11 result from ITM when it reports full year results nextmonth, underpinning our 8%dividend yield expectationfor the stock. Management is guiding for a more conservative production and cost profile during the next 2 yearswhich we adopt. This leads us to trimearnings by 10% and 9% during 12CL and 13CL. Recent share price weakness presents an attractive entry point and we prefer ITM over parent Banpu.Ourtarget price Rp46,000/sh offers investors 25% upside.
Expecting a strong 4Q11…
ITM will release audited full year 2011 accountsin the last week of March2012. Weanticipatea strong 4Q11on a stable ASP of US$97/tand productionreaching 24.7mt. The companywas a standout in exceedingexpectationsto 9M11 where peers fell short, and management continues to provide conservative guidance for 2012and 2013.
…which underpins the dividend yield
We expect ITM issitting on a war chest of ~US$575m cashas at the end of 2011. Management believesa balance of US$350m to US$400m is necessaryto ensure the company can move on any acquisitions indicating between US$175m to US$225m will be paid out as a final dividend during 1H12. We expect cashflow generation to stay strong in 2H12 leadingto a similarwindfall to shareholders during 1H12 andan 8%total dividend yield.
Steady growth ahead
Management is guiding forconservative productiongrowthin 2013,for which we adjust our estimate to 30mt (by -9%) to reflect.We now expect Trubaindo and Bharinto to produce 10mt combined in 2013 downfrom 13mt.Production growth of 10% isin line with the sector’s 9% CAGR over the next2 years.ITM expects a higher strip ratio of 13bcm/t up from 12bcm/t due to the Kitadin projects which moderately increasescosts. Combined this leads to earnings revisions of -10% and -9% in 12CL and 13CL respectively.
Prefer ITM over Banpu, BUY with target price Rp46,000
While our view is parent Banpuwill underperform on issues at Centennial, ITM will keep churning outcash. After a slewof consensus target price downward revisions, ITM has underperformed peers during the first month of 2012. We value the stock on a blend of 10x forward PE, 6x EV/Ebitda and NPV using 12CL/13CL estimates. Our preference for the stock remains unchanged and the yield provides investors witha nice cushion if we enteranother ‘risk off’ equity market.

Expecting a strong 4Q11 which underpins the dividend yield
ITM will release full year 2011 audited accounts during the last week of March. We anticipatea strong 4Q11 result on a stable ASP of US$97/t, production reaching 24.7mt and NPAT increasing 140% to US$491m.
The company was a standout in meeting guidance during the 9 months to Sept2011, exceeding consensus earnings and marginestimates.

Sitting on a war chest of cash
We anticipate ITMis sittingon a war chest of ~US$575m cash as at the end of 2011. Management indicates a balance of US$350m to US$400m will be kept to ensure the company can move on any acquisitions indicating between US$175m to US$225m will be paid out as a final dividend during 1H12.
We expect cashflow generation to stay strong in 2H12 leading to a similar 2H12 windfall toshareholders andan 8% total dividend yield.

Steady growth ahead
Management is guiding for conservative production growth in 2013, for which we adjust our estimate to 30mt (by -9%) to reflect.
Near term ITM expects a higher strip ratio of 13.1bcm/tin 2012 which will normalise to 12.5bcm/tin 2013 after pit cutback work at Kitadin is complete.

We note Trubaindo and Bharintohave potential to surprise and can handle higher throughputthanITM’s currentconservativeguidance of10mtin 2013.
As highlighted in our November 2011 note, Coalin the jungle,infrastructure at the site can currently handle an estimated 13mt, though any increase would require a revised production plan in conjunction with contractor Pama (United Tractors).

As we highlighted in our recent‘Myth Busters’note, a shorter mine life versus peers of 13 years is not a risk to sustainedproduction or growth and the company has been successful in replacing reserves duringthe last 5 years.
48% of ITM’s JORC reserves today lie in the growth projects Trubaindo and Bharinto.

Higher strip ratios a sector trend
Strip ratios have been increasing in Indonesia, as illustrated by the aggregatestripping ratios from the 2 largest mining contractors. Between themUnited Tractorsand Delta Duniahave a total estimated 59% market shareof coal mining contracting.

The increasing trenddoes not imply operational incompetencefor the miner, ratherprofit maximisationas higher coal prices support deeper extraction at the margin.
Allthe 1stgeneration CCoWs in the country (including Adaro, Kideco and ITM) are experiencing the same situation.Bumi’s aggregate strip ratio is expected to decrease as it develops lower energy coal deposits at Arutmin with lower economic mining strip ratios.

In ITM’s case, higher stripping in 2012 isexpected due tothe Kitadin project and some cut backs at growing Bharinto/Trubaindo.
The Kitadin projectinvolves reopening closed pitsleading to production growth from 1.4mt to 3.5mt during the next 2 years.

Prefer ITM over Banpu. BUY with target price Rp46,000
We value ITM on a blend of 10x 12CL/13CL PE and 6x12CL/13CLEV/Ebitda.
After a slew of consensus target price downward revisions, ITM has underperformed peers during the first month of 2012.

In our view ITM deserves to trade at a premium to its Indonesian thermal coal peers on its high earnings visibility and conservative, transparent management.
Our preference for the stock remains unchanged and the yield provides investors with a nice cushion if we enter another ‘risk off’ equity market.
High correlation with Banpu deviating
ITM has outperformed Banpu on currency adjusted terms since 2010 providing investors double the shareprice appreciation. Morerecently,the 1 year forward PE correlation has broken down with up to a 1.7x gap appearing during December.

Investment risks
The key risks which couldalter our view include thermal coal prices, oil prices for input costs. The company does have a policy of hedging up to 80% of its fuel exposure subject to an annual budget and spot coal sales(typically 5% of its annual total) via swaps withits banks.
ITM’s multiple mine sites providessomediversification for isolatedoperationaldisruption events such as the recent East Kalimantan bridge collapse and localised severe rainfall during the wet season.

Companies mentioned
Adaro Energy (ADRO -RP1,820 -UNDERPERFORM)
Banpu (BANPU -BT592.0 -SELL)
DD Makmur (N-R)
United Tractors (UNTR -RP28,350 -BUY)

Source: CLSA dated 2 January 2012