UOB-KH Indo Tambangraya Megah

Indo Tambangraya Megah
Strong financials and modest expansion aspirations

Owned by Thai-listed Banpu, ITMG produces one of the highest quality coals. It boasts prudent management and modest expansion plans.Acquisition and development ambitions should be within its means as the company is in an enviable net cash position.

Corporate Event
Owned by Thailand-listed Banpu PCL. Indo Tambangraya Megah (ITMG) is owned by Thailand-listed coal mining company Banpu PCL through the latter's wholly-owned Indonesia-based Centralink Wisesa International.Established 1987 and listed in Dec 07, ITMG is an integrated coal mining company with mining, processing and logistic operations in Indonesia.

ITMG has five affiliated companies, of which three are active operational coal mines: Indominco Mandiri (Indominco), Trubaindo Coal (Trubaindo) and Jorong Barutama Greston (Jorong). The other mines in Kitadin and Bharinto Ekatama (Bharinto) are expected to commence operation in 2009 and 1Q10 respectively.

Top quality coal.ITMG's coal is of the highest quality with an average calorific value of Rp6,230kcal/kg compared with 5,000-6,200kcal/kg for the other three major listed coal companies.

Prudent management with modest expansion plans. ITMG is one of the four largest coal stocks and top 30 largest stocks on Indonesia's stock exchange. Although ITMG has the lowest reserves of 11.8 years of production compared with 23.4 to 163.7 years for its peers, ITMG boasts prudent management and modest expansion plans. Its acquisition and development ambitions should be within its means as the company is in an enviable net cash position while other mining companies are facing tight financial constraints amid the current credit crunch.

Higher earnings in 2009 on increase in sales volume and ASP. Net profit is likely to grow 5% yoy to US$246m in 2009 on assumption of modest sales growth and a 9.6 % rise in production volume. Although benchmark coal price could fall 38% yoy to US$80 in 2009, ITMG's coal ASP may inch up 2.5% to US$65.80 due to rising contract sales prices that lag spot prices by one to two years. We expect revenues to rise 13% yoy to US$1,407m in 2009.
Net profit should fall 17% yoy to US$205m in 2010. This is based on our assumption of a 6% decline in benchmark coal price to US$75 in 2010 and a 16% decline in ITMG's ASP to US$55, on the back of modest 5% growth in coal sales volume.

Valuation/Recommendation
Higher valuation for careful management and corporate governance.We initiate coverage on ITMG with a BUY recommendation and target price of Rp12,900, which implies a higher valuation of 4.7x 2009 PE and P/BV of 1.8x in view of its careful management and corporate governance. The target price, a discount to the regional FY09 PE of 8.7x and P/BV of 1.6x, still offers 32% upside from the current price. This is a discount to our fair value estimate of Rp14,226, derived
from our three-year DCF valuation and the value of the remaining coal reserves.