KimEng More optimistic on pricing, but less robust on volume

Result above expectation
Bukit asam posted net profit of Rp2,228b in 9M09, a 69% surge compared to Rp1,321b in the same period last year, driven by higher contract price to Suralaya. For 3Q09, Bukit Asam reported Rp636b net profit (-5% QoQ) on the back of -5% drop in quarterly sales of Rp2,054b. Result in 3Q09 is lower than consensus estimate, but higher than our expectation. The company booked Rp88.8b for third-party services in 3Q09, something we did not see in the previous quarters, as part of production costs.

More optimistic on pricing
The main difference with consensus estimate is that we had factored in adjustment of contract price with Suralaya in our FY09 forecast. We had assumed that Suralaya would have renegotiated its coal price for FY09 delivery by 13% lower to the average Rp770k/ton from existing Rp884/ton. Our recent discussion with management reveals that such downward adjustment for FY09 contract is unlikely to happen. Management plans to start a negotiation for FY10 coal delivery with Suralaya, its single biggest client with est. volume of 5.1-6.1m tons in FY09, before the year-end. We currently view that contract price below Rp700k/ton for next year is unlikely and assume Rp707k/ton in our FY10 forecast or 12% higher than our initial assumption of Rp630k/ton.

Raising target price, but maintain HOLD recommendation
We have incorporated our new assumptions of contract price of Rp884k/ton and Rp707k/ton for FY0910 for Suralaya and cut our sales volume estimate to 12.76m tons for FY09 and 14.6m tons for FY10 respectively. Accordingly, we adjust our net profit estimate by +13% and +21% to Rp3,064b and Rp2,017b for FY09-10. We still view that newsflow on progress of railway expansion with total target 42.7m by 2014 from 10.3m tons in FY08, as catalyst for the stock in the short-term. We use DCF method with WACC 14% (from previously blended method) and arrive at Rp14,386/share. As such, we raise our target price to Rp14,400 from previously Rp13,500. The counter is trading at 10.9x-16.6x FY09-10 PE. HOLD.