JP Morgan - Indo Tambangraya Megah; Projects are on schedule and PT raised to Rp 28,000/sh

Model revisited: We revisit our model and make the following adjustments: (1) as long-term coal prices have risen by 9.3% CAGR, we incorporate a 10% long-term growth estimate in our coal price assumption; (2) we extend the PT time horizon from Dec-09 to Jun-10; and (3) lower our risk-free rate assumption from 13.0% to 11.5% (in line
with recent adjustments by J.P. Morgan Indonesia).

Projects are on schedule: The Bontang terminal expansion and coalfired power plant are on schedule. At the Bontang terminal, the port stockyard expansion and new in-loading system have been completed. ITMG expects to complete the increase in conveyer belt capacity and barge loader installation by Jun-09. By Nov-09, the barge unloader system is expected to be completed. At the coal power plant, the construction is 80% complete and is expected to begin power supply by 2H09.

Larger capacity and lower cost: Once these projects are completed, ITMG expects its coal-handling capacity at the terminal to increase 12MM tons to 20.5MM tons (up ~70%). This expansion could bode well for production at Indominco, in our view. In addition, the power plant is expected to lower its fuel requirement by 1.5M liters, lowering the cost of diesel fuel by US$1.2MM.

We maintain OW and raise our PT to Rp28,000: With the recovery in global demand for coal, we maintain our Overweight rating on ITMG and raise our PT from Rp20,000 to Rp28,000. Our PT is derived using the DCF method with a risk-free rate of 11.5%, equity risk premium of 5.5%, and a terminal growth rate of 7.0%. Risks to our PT are: (1) continuing low coal prices; and (2) low production volume.