Macquarie Indo Tambangraya Megah Still our preferred play in Indonesia

Event

We reiterate our Outperform recommendation and increase our target price from Rp21,000 to 24,500, representing 7% potential upside to the current price. The limited upside to our target price reflects our sector view that it appears fully valued. Further, our global commodities team has marginally increased its thermal 2010 forecast from US$65 up to US$70 per tonne.

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 US$90– 100/t in 2011. Further we are cautious on the coal price near term as we do not believe the Chinese import arbitrage economics work at current levels.

Solid production and capacity growth. The company has a sound production outlook of 10% pa, especially with the commencement of production at Indominco East block by 2H09. Further, in 2H09 it will increase its port load capacity from 12mt up to 18mt.

Solid 2009 earnings visibility. Currently the company has priced 90% of its production at a price of at least US$78/t (including coal swaps for index-linked contracts). The company is also starting to lock in 2010 contracts at high
swap values.

Solid balance sheet …useful in difficult times. At the end of 1Q09, the company was in a net cash position of roughly US$223m. This should position it for either an attractive acquisition or to increase shareholders’ remuneration.

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

Cheapest stock in the sector… Whilst on an absolute basis, we see limited upside to our target price, the stock is the cheapest in the sector at a 16x 2010E PER vs 20x the Indo coal sector. Further, should coal prices rise US$10 higher than our US$70/t forecast – we see the stock trading at 10x.

Earnings and target price revision
We upgrade our 2009/10 net profit forecasts by 4% and 22%, respectively, on the back of a higher prices and production and slightly lower costs.

Price catalyst
12-month price target: Rp24,500.00 based on a DCF methodology.
Catalyst: Increasing coal price, production, and shareholder’s remuneration.

Action and recommendation
We reiterate our Outperform recommendation and raise our target price to Rp24,500. The stock remains our preferred pick in Indonesia given its increasing production and solid 2009 earnings visibility, and it is the cheapest stock in the sector.