Back of the envelope calculation on Indika's earnings potential and a meeting with its management suggest a further 30% share price upside, despite the rally already seen in the past several days. Potentially, INDY is now the most attractively priced stock within the Indo coal universe ex-Bumi (a special situation due to market risk aversion towards Bakries), on P/E methodology. JPMorgan research offers no coverage on the name. I have attached my back-of-the-envelope calculation on INDY in excel format in this e-mail. Key findings:
1. INDY received US$129mn dividend income from coal subsidiary Kideco (46% owned) based on FY09 (ending Dec) performance. Compared to INDY's market cap of US$1.66bn, the dividend income alone implies an FY09 P/E ratio of 12.8x, cheap compared to its peers.
2. Accounting one-offs have masked the true profitability profile for INDY. Reported net income for FY09 was only Rp725bn (US$80mn), much lower than the US$129mn dividend income from Kideco. Combined one-offs would total to Rp551bn (US$61mn), including asset and bad debt write-offs and f/x loss.
3. The US$98/ton thermal coal settlement price for JFY11 and Kideco's volume target of 29mn tons for FY10 (vs. 24.8mn tons for FY09) would mean that dividend income from Kideco may grow 37% to around US$170mn in FY10. Assuming zero earnings and equity value contribution from INDY's other subsidiaries (Tripatra, Petrosea, Cirebon energy, Santan), the implied FY10 P/E is just 10.0x, 15-20% cheaper compared to its peers.
4. INDY has around US$75mn net cash position as of March 2010, while subsidiary Kideco is (almost) debt free. Other subsidiaries Tripatra, Petrosea, and Cirebon energy combined could worth around US$288mn on equity value. We have ignored the value on exploration assets and Santan Coal, to keep things simple.
5. If we assign a fair FY10 P/E multiple of 12x for Kideco, and add the back-of-the-envelope value estimates for other subsidiaries, we would arrive at around Rp4300 per share fair value for INDY.
6. Kideco has 579mn tons in reserves (160mn proved and 419mn probable), and 1.14bn tons in resources.
Why the investment opportunity on INDY?
>> Not a well covered stock. Overly conservative estimates by those who cover the stock.
>> Unproven company structure, with only 46% stake in key asset Kideco. But the FY09 dividend policy serves as another confirmation that flow of cash/profit from Kideco to INDY is not an issue, adding to the track record of >80% dividend payout in the last 5 years.
>> Write-offs and accounting complexity during take-over process of Petrosea. Access to company management has also been difficult due to blackout periods in FY09.
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