Domestic contracts apparently not as secure as thought In a recent meeting, PLN said it intends to discuss lowering coal contract prices with its domestic suppliers. We do not think this move is unreasonable considering: (1) the JFY09 coal price was fixed at US$70/t, 50% below contracts priced in 2H08; (2) during coal rallies, Indonesian coal players like PTBA have had prices raised threefold in a year; and (3) lower contract prices could ease government subsidies (at Rp630, the electricity tariff is way below the cost of Rp1,022 in 2009). We are aware of the President Director of Indonesia Power’s comment that it would not revisit PTBA’s coal price, but find the downside too large to ignore while the upside is capped.
Cut earnings estimates, PO 6% to Rp8,000
While domestic sales account for 70% of total coal sales, our ASP adjustment is relatively small. For starters, we have always assumed a conservative domestic coal price: US$64/t vs the recently settled US$73/t. Assuming repricing negotiations are successful, we think they would take three months, and we would only expect the new price to be valid in July and it is unlikely to be retroactive. We cut our 2009 domestic ASP 11% and net profit 13%. We trim our PO by 6% to Rp8,000.
PTBA still looks best among pack
On concerns over weakening global coal demand, rising competition from Australian coal, exacerbated by an unfavorable new trade policy, ie, the new government requirement to use L/C for all coal exports, we still favor coal players with a dominant presence in the domestic market, such as PTBA. Even after adjusting for contract repricing, we think PTBA’s valuation still looks inexpensive compared with peers, trading at a 32% discount to local peers’ 2009E P/E. PTBA remains our top pick.
Peers with majority export contracts not spared
Platts reported that Indian rival JSW Steel said late in February that it won a price cut from Rio Tinto to US$175/mt FOB Queensland on the remaining contracted coking coal deliveries for the current fiscal year. While we have not heard of any Indonesian contract price being renegotiated, we see this as a sizeable downside. Up to 75% of Indonesia’s coal export volume in 2009 has been priced around 50% higher than the recent JFY price settlement of US$70/t.
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