We are raising our target price from Rp8,400 to Rp10,800 to reflect to lower required rate of return. There is no change in our earnings estimates.
Our cost of equity estimate for PTBA has been reduced to 19% from 24% to reflect lower Indonesian sovereign bond yields. Our equity risk premium (6%) and beta (1.5x) estimates have been kept unchanged.
While PTBA’s exposure to international coal price is lower than most of its peers, stable to higher international coal prices would lower the risk of a negative revision to domestic contract, which is the biggest risk to our FY10 earnings estimates.
PTBA’s stock performance has so far been in line with the market. But it is trading at a discount to its peers’ valuations based on our estimates and could potentially still gap up should the coal spot strengthen.
We retain our NEUTRAL rating on the stock.
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