Better condition ahead
• Oil price starts to edge up
• Demand for coal remains resilient
• DMO regulation is not a concern
• Changing our coal price assumption for 2010-2011
Oil price already up 57% y-t-d. Latest oil price already stands at US$68/bbl, amid the FY09 average remaining at modest level of US$48/bbl as recent rally in price only
started in the last 1-2months. It is too early to determine whether the price increase represents the demandsupply picture, but we view that the price does reflect
investors’ optimism that economic recovery is already underway. Our economic team sees that recovery in the global economy will continue to take a positive stride.
Coal demand remains resilient. Our channel check with major coal producers in Indonesia suggest that demand for coal remains strong. These companies are maintaining their production growth for 2009 and remain confident that the additional coal produced will be absorbed by their customers. So far, there has been
no order cancellation.
DMO not posing a risk. The Indonesian government has stated that they will issue a more detailed domestic market obligation (DMO) policy next year, specifically on
the pricing mechanism and the percentage of coal production required for the domestic market. However, we see that the DMO regulation will not impact coal producers’ revenue as price for the domestic market is similar with global price. This is proven by Bukit Asam (PTBA), which is able to sell its coal to state-electricity power plants at a good price, inline with 2008 global price when the negotiation took place.
Raising our coal price assumption. We revised our coal price assumption for FY10-11 period to US$100/ton from US$80/ton previously, as we expect recovery in global economy will have positive impact on global coal demand, thus impacting price as well. Following the coal price revision along with lowering our risk free assumption to 9.5%, we revised our target price for all counters under our coverage. Our top pick for the sector are Bukit Asam (PTBA), Adaro Energy (ADRO) and Straits Asia Resources (SAR).
Adaro Energy (ADRO): Revised up our target price for ADRO to Rp1,650 and maintain our BUY recommendation.
Bumi resources (BUMI): Raised target price to Rp1,900 and changes our recommendation to HOLD from fully valued.
Indo Tambangraya Megah (ITMG): Raised target price to Rp22,950 and changes our recommendation to HOLD from fully valued.
Tambang Batubara (PTBA): Our target price raised to Rp16,450 and reiterate our BUY call on PTBA.
Straits Asia Resources (SAR): New target price of S$2.26 and maintain our BUY recommendation.
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