Mandiri Sekuritas INDY: Improving operations

Indika Energy indicated FY09 earnings to be around Rp725bn (-33%yoy), which came slightly below our forecast. However, on operating level, it showed an improvement, with top-line and operating income growing by 7%yoy and 55%yoy, respectively. We continue to like the stock given that (a) there will be sustained coal production growth (b) better contribution from Petrosea and Tripatra by virtue of higher order book and the (c) potential synergy with regards to it power plant project in 2011. We maintain buy on the stock, which currently trades at PER10F 13.7x, and the current price poses a 22% upside to our price objective.

Improvement seen at operating level. Despite the drop in earnings, which we suspect to be largely attributed to certain one-off charges and higher interest expenses, the company was able to improve on operations. Petrosea, an EPC company acquired in August 2009, posted net profit in 2H09 of US$16mn from a loss of US$15mn in 1H09. In fact in 2010, 55% of Indika’s capex of US$93mn will be spent for Petrosea, to boost its contribution further.

Significantly higher order book. Thanks largely to the newly bagged projects, Tripatra’s order book is seen to jump to almost US$800mn (from US$116mn) spread over until 2014. Petrosea, on the other hand has some US$640mn in contracts valid until 2014 as well. Thus we expect pre-tax earnings contribution moving up to 20% (from 14% in 09) by 2010 from these two.

Coal production remains as the stabilizer. Coal unit Kideco will continue to be the principal driver of growth, with coal production growing by 17% to some 29Mt in 2010.

CEPI synergy by 2011. The 660-MW power plant project (Cirebon Electric Power), where Indika has a 20% interest, is progressing as scheduled, with expected completion by 2011. Kideco is seen to be one of the main suppliers of coal for this project, which has a standing off-take agreement with PLN.

Maintain Buy. We continue to fancy the company’s plans of (a) improving operating units performance of Tripatra and Petrosea (b) stable contribution for coal production and (c) adressing the need of expanding customer base by CEPI synergy, among others. Maintain buy as the stock trades at PER13.7x.