Macquarie Coal update

Adam Worthington (analyst) came back from his first China trip still feeling cautious toward thermal coal price. They think that China thermal coal market could be over-supplied by between 100-400mn tons, and that China domestic coal price is at artificially high level due to “temporary” maintenance schedule at QHD port, that handles around 10% of China coal volumes. This artificially high domestic price in China is causing the country to import thermal coal, temporarily sustaining the international price. Separately, Yeeman Chin (China coal analyst) wrote a comment on NDRC analysis of China coal market in 1Q09 below.

Personally, I still have my doubts that a temporary maintenance schedule at one port that only handles 10% of volume can cause this much price disturbance. There could be bigger forces (ie: re-stocking or normalization of production activities) at work here, that warrant some optimism. Having said that, I think investors should consider taking some profits out of PTBA and Adaro Energy. Meanwhile, Bumi Resources and ITMG appear to be relatively better bet for the next three months.

PTBA just reported a solid but in-line 1Q09 results with revenue +89% y-o-y (22% of FY), EBIT +201% (29% of FY), NPAT +221% (32% of FY), and a net cash position of Rp3.5trn (US$321mn). What worries me today is the comment by PTBA CEO Mr.Sukrisno, saying that the company is evaluating the purchase of a 17% stake in Adaro Energy (Rp5.4trn value at Rp1000/share vs. PTBA market cap of Rp20trn), in a bid to boost its coal reserves. The market may react negatively to this comment, as the market may struggle to understand the logic of the acquisition and start pricing-in an increased acquisition risks (thanks to net cash position). Macq rates the stock a Neutral on 6.7x and 14.4x P/E for 2009-10 and Rp7,500/share DCF.

Adaro Energy received a good news yesterday after the controlling shareholders (Dianlia) won the case against Beckkett in the Singapore Court of Appeal, saying that they are the rightful owner of the company. Irrelevant to Adaro’s investment case, Beckkett won the case against Deutsche Bank for selling the stake to Dianlia without a proper procedure, although Deutsche Bank could be looking to counter-suit Beckkett for the loan default. All said, the stock may have a hard time pushing through the IPO price of Rp1,100/share, with potential overhang from the 17% stake sale owned by the private equity firms. Macq rates the stock a Neutral on 6.3x and 14.7x P/E for 2009-10 and 890/share DCF.