AAA PT Indo Tambangraya Megah Tbk Inline Expectation

± Inline result
ITMG reported net profit of US$ 67.17 mn, down 34% yoy (-3.6% qoq). Lower earnings result came from lower margin due to lower ASP of US$ 66.58/ton, down 21.6% yoy, and higher selling cost which increased 78.9% yoy up to US$ 25.5 mn caused by higher demurrage cost following testing system in Bontang port pre commissioning. Overall 1Q10 earnings result came inline our expectation and consensus which account 22% - 23% of 2010 full year estimates with operating margin down to 23%.

± Strong sales volume growth of 48.4% yoy
Revenue was up strong 17.4% yoy (-11.9% qoq) back up by higher sales volume of 6.08 mn tonnes up strong by 48.4% yoy. The main largest demand growth came from China which jumped significantly to 1.8mn tonnes compared to 1Q09 only 77k tonnes. While Japan sales volume was up 27.3% yoy to 1.4 mn tonnes. Company expect this year, export to China would double from 2009. While Japan and Korea would be maintained. Production increased well by 36% yoy to 6 mn tonnes. Indominco and Trubaindo production grew by 52.5% yoy and 33.2% yoy respectively. While Jorong dropped 55.8% yoy to 354k tonnes following the operation shut down in early February 2010. Management expects that Jorong’s mine would start to reoperate by July – August 2010.

± Pricing In – Downgrade to HOLD
ITMG is one of the most attractive coal companies due to its multiples valuation and robust balance sheet. However, based on its EV/ton ITMG is considerably one of the most expensive coal companies in industry due to its depleting resources. Inorganic growth through acquisition is still the major key success for ITMG in our view. We see that market should have priced in its prospect. Valuation wise, we see that ITMG stock is not cheap anymore considering forward P/E multiple has tendency to revert down in near term. But we do still like the company. Our TP maintained at Rp 38,500 per share only offers 5.6% potential upside and we downgrade our rating from BUY to HOLD while waiting for more positive catalyst towards its valuation. Currently ITMG traded at 15.4x – 10.6x P/E 2010F – 11F.