OSK Tambang Batubara Bukit Asam TP IDR12,200

A steady operation
We initiate coverage on Tambang Batubara Bukit Asam (PTBA) with a BUY recommendation and a DCF-derived target of Rp12,200/share based on 14.9% WACC and 5% terminal value growth. Our target price implies 2009-10F (non-cash)PER of 8.1-10.3x which is attractive compared to domestic peers’. Our upbeat outlook on the stock is based on 1) downside protection from long-term contract with PLN, 2) under-appreciation of recovery in railway operation, and 3)potential upside from future projects which can more than quadruple current sales volume.

Downside cushion. PTBA’s long-term contract with Indonesia Power (IP), a subsidiary of PLN (the state electricity company), will both create captive market and provide downside protection for PTBA, in our view. The contract is quite flexible in our view to enable PTBA to feed lucrative export demand. Pricing should not be an issue, we think, as the government never intervenes in the negotiation process and it is already at par with international price. Under-appreciation of recovery. With annual railway volume growth of 29% and 15% in 2008 and 1Q09, respectively – the highest growth levels in the last 12-16 years - we believe that the long-standing railway problem is already behind PTBA. We expect railway utilization rate to steadily increase and reach its full capacity in 2012. Given these positive developments, we believe that the market should have higher confidence to this recovery process and, therefore, give lower risk premium to the stock.

More to come. We believe PTBA is moving in the right direction with four projects in hand. Funding should not be an issue in our view given PTBA’s very strong and unleveraged balance sheet. Project execution we believe is the biggest risk. We have not factored in any of the projects in our analysis, but we believe that the projects are NAV-enhancement should all of them come on stream.

BUY, target price of Rp12,200. Our target price of Rp12,200/share is DCF-driven using 14.9% discount rate and 5% terminal value growth. The target price implies 2009-10F (non-cash) PER of 8.1-10.3x, lower than domestic peers’. Catalysts to the share price may include recovery in coal price and better-than-expected earnings.