Macquarie Bukit Asam Priced for perfection

Event

We downgrade our rating of PTBA to Underperform from Neutral but slightly upgrade our target price to Rp8,100 from Rp7,500, representing 39% downside from the current price. Our global commodities team has marginally increased its thermal 2010 forecast to US$70 per tonne from US$65.

Impact

Improving thermal coal outlook but reflected in forward coal market. We see our medium-term supply/demand balance tightening; however, we think this is more than reflected in the current forward curve, with coal trading at US$90–100/t in 2011. Furthermore, we are cautious about the coal price near term, as we do not believe that the Chinese import arbitrage economics work at current levels.

What goes up . . . must come down. PTBA was very successful in a timely negotiation of its largest contract (Suralaya) in 2009, up 59%, due to the high coal prices at the time (US$125/t) but also the exchange rate of Rp12,000/US$. We forecast a 43% decline in this contract price in 2010, reflecting our US$70/t forecast but also an exchange rate of Rp9,625/US$.

Expensive vs our DCF-driven target price . . . The stock trades at a substantial premium to our DCF-driven target price of Rp8,100, where we assume volume increases from 13mt (2008) to 20mt (2012) via expansion of the existing railway. It also trades at a premium to our fair value (Rp10,800), where we assume the two power plants and new railway are completed, which increases sales volumes to 52mt (2015). To back out the current share price, we need to assume that US$90/t and volumes increase to 52mt in the long term.

. . . and too expensive on a relative basis, trading at 17x PER in 2010E, 4.9% dividend yield and 5.7% FCFE yield in 2010E. We think the stock is pricing in US$80/t (2010) by backing out a 12x PER, which is a reasonable upside scenario, in our view; however, at best we think the stock is fairly valued.

Election upside = market re-rating. We see the potential for a further re-rating in the market should SBY achieve a landslide victory.

Earnings and target price revision
We upgrade our earnings estimates by 3% and 30% for 2009 and 2010, respectively, on the back of our higher price assumptions and lower costs. However, we are 37% below consensus expectations in 2010. We slightly upgrade our target price to Rp8,100 from Rp7,500.

Price catalyst
12-month target price: Rp8,100 based on a DCF methodology.
Catalyst: Repricing of contracts downward in 2010, coal price weakness.

Action and recommendation
We downgrade our rating of Bukit to Underperform from Neutral due to its expensive valuation versus the market, and our price target and fair value.