CLSA Rajawali 's railroad deal

Over the weekend, local media reported that Indonesian savvy investor Peter Sondakh from Rajawali Corp has bought an 80% interest in a US$1.3bn Sumatra rail project from Transpacific Group. This feasibility of this railway project has been long written off by most investors as it has remained being a "concept" for literally the past decade. However, this latest development is a major endorsement / game changer to finally materialize this ambitious plan to potentially quadruple Bukit Asam (PTBA IJ) coal production to 50m tonnes in five years. Rajawali would inject US$390mn equity into the project, to be funded by last month’s sale of a 23.7% stake in Semen Gresik (SMGR IJ), worth US$1.1bn.

Key takeaways on the Transpacific deal:
Rajawali group is in talks to take over majority ownership of a US$1.3bn Sumatra railway project from Transpacific Group.
Rajawali, reportedly, is also in talks to become a partner with Bukit Asam at Banko Tengah mine.
We view this positively as Rajawali would bring in capital (The Group just sold its stakes in Semen gresik for US$1.1bn) while it is already partnering with Bukit Asam in IPC mine in Kalimantan, hence we expect less friction. Note that we have doubts that current partner in Transpacific Group has sufficient funding to meet its capital requirements.
While potential entrance of Rajawali into railway project would not make much different to Bukit Asam’s near-term earnings, its long-term production and earnings potential would be clearer and stronger.
We are reviewing our rating and numbers on Bukit Asam.

Implication for PTBA (by Olie)

Our current NPV is Rp17,500, based on existing production plus upside from new railway, to be completed in 2015. Should the railway is completed 1 year ahead of our estimate, there is an additional Rp1,000/share to our estimate. Should we roll our DCF forward to 2012, then Bukit Asam NPV could be Rp23,000, suggesting some 30% upside.
As we have mentioned in our previous report, for investor to invest in Bukit Asam, it is a delicate balance between near-term valuation and long-term potential. Near-term valuation looks expensive to us, as Bukit Asam is trading at 20.0x 2010 earnings (we are about 15% below consensus) and 15x in 2011. Long-term potential is there, nevertheless, as the company could be the fastest growing coal company in Indonesia, quadrupling its output in 5 years. We think Rajawali Group could bring in credibility to this growth potential.