CLSA Bukit Asam – One step forward for new railway , comment from our coal analyst Olie

Bukit Asam JV for new railway project has recently signed EPC and O&M contracts with China Railway Group for 307km railway system that has a capacity of 27m tonnes per annum. This project would include tracks, loading and loading facilities, and port.
Contracts are valued at US$1.3bn for EPC and US$3.5bn for O&M. China Railway has four years to complete this from signing in Mar10 and would act as the operator for this railway for 20 years, with a guaranteed capacity of 25m tonnes per annum through a take or pay agreement.
This is overall positive for Bukit Asam, an important step toward unlocking value of its massive reserves. What are the key changes here?

· China Railway will have 3 months for finalize design layout for the project before land clearing could proceed.

· Higher capex but much more tonnage. Estimated capex is higher at US$1.3bn as compared to US$1.1bn previously. However, targeted capacity, 27m tonnes, is also higher than previously assumed of 20m tonnes.

· At around US$7/t (US$3.5bn O&M contracts for 25m tonnes per annum over 20 years) cost per tonne to deliver coal seems to be lower than initially estimated of US$12/t. Should we calculate cost on per tonne kilometre, Bukit Asam would pay around US$c2.2 to China Railway, 35% cheaper than US$c3.5 currently contracted to PTKA. We will need to get more detailed information here. We believe there could be some additional cost associated for coal loading and unloading while the JV will also need to spend on rolling stocks, adding to the costs, with China Railway only acting as operator, and hence total cost may not be that much different from what paid to PTKA which has been used as reference for the project.
Some concerns remain, in our view, especially as we have seen sustained delays on Bukit Asam projects.

· Financing from Chinese banks are not 100% secured. Looking at the experience of PLN that have used Chinese contractors as well on most of its 10GW power projects, loan disbursement from Chinese financiers kept getting delayed.

· We are still a bit concern on JV partner, Transpacific that seems to have issues in raising capital. There are talks that new, and hopefully more capable, investors would step in, reportedly Barito Group, and Bukit Asam seems committed to step in should there is any issue on near-term financing. Note that Bukit Asam has a cash balance of US$500m, with no debt as of Dec09.
We continue to see Bukit Asam as a delicate balance between long-term and short-term prospect, how comfortable are investors betting on its long-term projects given current expensive valuations. For now, we retain our Underperform rating.

· Our base case on this project assumed 20m tonnes capacity to be ready by 2015, with a total additional capacity of 20m tonnes and capex of US$1.1bn. Should we apply the new capex, production, and completion in 2014, our DCF estimated could increase by around 17% to Rp20,500 per share. Bukit Asam would also trade at 6x PER in 2015.

· The counter, however, remains expansive on near-term earnings outlook, trading at 20x and 14x 2010 and 2011 earnings, respectively, suggesting future growth might have been partially factored in the share price.