Mandiri Sekuritas PTBA: Evidence of limited transportation - Resend

PTBA produced less than estimated due to bad weather and wagon derailment. It only produced 3.2Mt, or 21.6% of the planned 14.8Mt. It will be tough to catch up as train transportation looks already overstretched at this point. Good development was seen in the Transpacific railway project, and with the participation of cash-rich Rajawali Group, there is no doubt on the project financing capacity. As the railway project is slated for completion by 2014, fo! r the tim e being, any annual volume growth will rely on the state-on railway company PTKA’s ability to improve its capacity. We lowered our sales volume assumption to 13.8Mt, hence cut FY10 earnings forecast. However we are not lowering our TP of Rp18,750, as the downgrade does not significantly impact our DCF valuation. At the current share price we reduce recommendation to Neutral.

Litany of reasons. Lower sales volume was due to high tide preventing water transportation, and derailment of train wagons. The company obtained lower coal price on the back of generally lower benchmark price vis-à-vis 1Q09 and higher composition of lower grade coal for export (from 41% in 1Q09 export of 0.6Mt to 63% in 1Q10 from 1.3Mt of export in1Q10). Higher composition of export than domestic from 23% in 1Q09 to 40% in 1Q10 was due to lower take-up by the state-run power company PLN due to its high inventory. One good development in 1Q10 was lower PLN’s A/R days, which dropped from 97.9 days in 1Q09 to 67.7 days indicating better PLN cash flow management.

Expectation of improving metrics. With 1Q10 export price being based on Newcastle benchmark (6,700kcal) in 2009 which averaged US$71.7/ton, PTBA expects improved price in the following quarters as benchmark price has reached US$90/ton level in 1Q10. PTBA will also exported more high calorific coal. In the domestic front, price adjustments on the non-Suralaya supplies are also expected. However the company said that reaching 14.8Mt FY10 sa! les volum e target is a challenge.

Lowering volume sales. We lowered our estimated sales volume by 1Mt to 13.8Mt while still maintaining the average selling price. Short term catalysts are expected to come from announcement of new prices for the non-Suralaya supplies, and the conclusion of take-or-pay agreement with PTKA which will be used by PTKA to obtain necessary funding for its railroad infrastructure improvement. With current share price reaching our target price, we are downgrading our recommendation to Neutral as all above catalyst have been priced in.