Mandiri Sekuritas PTBA: Building the future

The Minister of State-Owned Enterprise asked PTBA to drop a plan to build a railway line in Sumatra with local and Chinese partners. We asked PTBA and we got confirmation that the plan, however is still continuing, Currently PTBA team is in China to discuss EPC contract, which will be followed by financing arrangements. The deadline is April 28, with an extension possibility. PTBA plans to continue the US$1.1bn project on its own if the partners can not fulfill their obligation. With Rp4.7tn (US$514mn) (of cash at hand), PTBA has the capacity to carry out the project on its own. The project will boost the company’s coal transportation capacity by 32.2 Mtpa in 2014 from 10.5Mtpa currently if it goes as planned. We are downgrading our target price as the FY09 result highlighted a higher-than- expected expense obliged to us to lower margin and hence to lower DCF. The downgr! aded targe t price did not make a change in our Buy recommendation.

4Q higher expenses trimmed margins. The results were below our expectation with margins below our estimates. FY09A gross margin was 54.1% (our FY09E gross margin : 56%), while FY09A operating margin was 39.7% (vs our FY09E of 46.1%). Coal railway service, which took 13.7% of revenue, was 16.8% above our FY09 estimate, resulting in operating profit achievement of 80% from our FY09 estimate. Gross margin deteriorated significantly in Q409 to 42.0% from previo! us averag e three quarters of 58.4%. While coal sale volume in 4Q was 29.1% higher than the previous average three quarters, mining services cost in 4Q jumped up 84.0%, while G&A and selling expenses were 47.6% and 44.9% higher, respectively.

2010 : Flat earnings growth. We upgraded our benchmark coal price assumption from US$80/ton to US$90/ton. However the impacts on earnings are mitigated by reduced sales volume estimate on possible lower domestic take-up due to a delay in the 10,000-MW power projects. We also tuned down operating margin forecast on cost adjustments in light of the 4Q09 results. Due to the fine-tuning in volume and cost, we have a new DCF-based target price of Rp18,750/shar! e, a 5.6% cut to our previous valuation. We are maintaining our Buy recommendation. The catalysts aside from the global thermal coal price movement is the completion of financing arrangements of the railroad project, closing on the current negotiations for power purchase agreement for it’s the 2x100-MW Banjarsari power plant and the 4x600-MW Banko Tengah power plant.