Mandiri Sekuritas PTBA: Mine-mouth power plants - typical infrastructure development problems

To monetize its low rank coal, the cheapest alternative for Bukit Asam (PTBA) is to build mine-mouth power plants. PTBA plans to build two plants: 2x100MW Banjarsari, and 4 x 600MW Bangko Tengah, both located near the Tanjung Enim mine. The Banjarsari project is the most ready to be developed; however it’s currently waiting for the conclusion of the power price renegotiation. Whereas, it can only build the Bangko Tengah plant if the government also develops interconnecting submarine cable. Coal con! sumption for the two power plants is 11-13 mn tons p.a. Without these power plants, PTBA can only produce a maximum of 15mn tons p.a. We have a new target price for PTBA of Rp13,280 (from Rp9,380), using lower risk-free rate assumption (9.5% from 14.2%), and lower equity premium (3.0% from 5.0%), with earnings downgraded due to rupiah’s appreciation, and higher fuel cost (US$0.66/litre from US$0.50/litre).

Huge reserves, in need of monetization. PTBA with 1.8bn tons of reserves and expected 2009 production of 12mn tons, still has ample room to increase its output. Together with its plan to improve existing railway and building new railway, PTBA could push its production to 45-50 mn tons p.a. However expansion plans are not going smoothly. In railway projects, JV with state railway operator (PTKA), is facing a stumbling block of Rp630bn capital gain tax from PTKA asset transfer (as part of their equity contribution) to the JV. JV argued against the tax as the asset will be given back when the JV expires. As for new railway, licensing process for obtaining pass-through permit is still ongoing.

Without this, PTBA is only a coal price play. We see strong potential in PTBA. As SOE, PTBA will be shielded from possible shrinkage in concession area as a result of the implementation of new mining law which restricts area for coal production if the current contract expires. Location wise, PTBA also operates in second most populous island in Indonesia, assuring potential takers of their mine-m! outh powe r plants.

Upgrading target price, lowering estimates, and upgrading recommendation from Neutral to Buy. For the short term, we have concerns on 2010 coal price for PLN, rising fuel price, and appreciation of the rupiah, as these dynamics will pressurize PTBA’s margin. But, for the long-term outlook, there is no doubt i! n our vie w that PTBA provides the best risk/return profile among coal counters.