BASML PTBA

Top-pick ranking well deserved, in our view

Amid rising concern over L/C requirements and a global decline in coal demand,we found PTBA to be the most protected among Indonesia coal peers. It has thelargest domestic coal exposure, and is one of the few players to always embrace L/C requirements for most of its coal exports. Maintain earnings/PO. Buy..

L/C requirement already in place for 70% of PTBA's export
Before a new trade policy on L/C requirements took effect on 5 January, only Japanese buyers (around 1mn t), which represent 30% of PTBA's coal export volume, or 8% of PTBA's total sales, were allowed to use Telegraphic Transfer. The remaining buyers were required to pay through L/C. We believe the impacts from the L/C requirements to PTBA are far smaller than to its local coal peers.

Earnings downside capped; upside seen
In our forecast, we have assumed an 18% YoY drop in export volume in 2009, which we expect to capture downside risk from falling demand. The price for 6mnt out of 8mnt of coal for domestic sales has been raised 60% YoY, but we only project a 40% ASP increase for total domestic sales. We assume the price for the remaining 2mn t to PLTU Tarahan & Bukit Asam will fall 20%, though this might not be the case as PTBA is still negotiating a price increase. 2008 prices for the two buyers were US$29-39/t CIF for 5800kcal GAD coal vs US$80/t 2009 price settlement for PLTU Suralaya (5900kcal GAD).

Positive share price catalysts
Catalysts are 1) strong core FY08 results mid-March (beware of one-off expenses from accounting adjustment); 2) settlement of the 2009 price with PLTU Tarahan & Bukit Asam by March; 3) solid 1Q09 results released in April; and 4)delivery of nine locomotives by July.

Attractive value proposition
PTBA trades at 5.7x 2009E P/E, 16% discount to local peers' average,excluding BUMI. We think the stock has been treated as "guilty until proven otherwise" in the bull market given past disappointment, which works nicely in the bear market.