Yesterday, Korea Electric Power Corp (Kepco) announced the plan to purchase a 20% stake in Bayan Resources for US$515mn, or Rp7000/share. The price implies an EV/reserves ratio of US$5.7/ton, looking robust compared to Bumi Resources at US$2.7/ton and Bukit Asam at US$2.1/ton. On the other end of the spectrum, however, we have IndoTambang (ITMG) trading on US$15.6/ton EV/reserves and Adaro (ADRO) on US$10.3/ton.
The market largely missed the money making opportunity in BYAN, which fell to as low as Rp840, four months after the IPO that was priced above Rp5000. The extreme valuation divergence among the six Indo coal names (on EV/reserves) highlights the strong herd mentality by public market investors, by continuing to bid up perceived winners like ITMG and ADRO, ignoring the other four names despite the valuation (PTBA an exception due to debate over ability to monetize the reserves). The situation offers opportunity for the non benchmarked investors, because believe it or not, the M&A appetite in the sector for non-controlling stakes in Indo coal companies has remained fairly strong.
Structurally, the demand-supply outlook for coal looking favorable despite the uncertainty on global economic cycle. It takes two to three years to build a steam power plant, and it would be difficult to stop half way during construction and not use it after completion. From the consumer point of view, once you have electricity, there will be no going back.
My favourite coal M&A plays would be Bumi & Indika, but among the benchmark coal names my pick would be Bukit Asam (PTBA).
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