Danareksa Bayan Resources (BYAN IJ, Rp 8,550 SELL) Tough Times

FY10-11F core EPS estimates slashed by 32.3-18.9%, SELL recommendation unchanged
We adjust our coal sales forecast, stripping ratio and capex estimates for 2010-12F, to take into account BYAN's weaker-than-expected 1H10 results - although our ASP forecasts are not changed. As a result of these changes, our FY10-11F core EPS estimates are cut by 32.3-18.9% to Rp130-264/share. We also arrive at a new TP of Rp3,650, implying FY11F P/E of 14.2x. From the current share price, downside is a hefty 57.4%. SELL recommendation maintained.

Weak first half of the year
BYAN's 1H10 results came in below expectations. The 1H10 production only reached 5.6Mt (41.9% of our full year forecast) while the 1H10 revenues only reached Rp3,788bn (40% of our full year forecast). What's worse is that higher hauling and barging costs - caused by higher fuel prices - on top of higher interest expenses squeezed the net margin to only 0.9% in 2Q10 from 7.6% in 1Q10. All in all, the 1H10 net margin was 4.3% - yet still better than 1H09's net margin of just 2.9%.

Coal production to remain depressed going forward
We cut our FY10F coal production estimate to 11.9Mt - or 10.7% lower than our previous forecast - to reflect the 1H10 results. We downgrade our targets for the underperforming Wahana, Perkasa and FTB mines, yet upgrade our targets for Gunungbayan and Teguh/Firman. This shift in the production mix will lead to higher ASP and a slightly higher stripping ratio. For the ASP, we believe it will pick up in the remaining quarters of the year and reach USD73.5/t for FY10F as BYAN has already contracted around 10.9Mt of coal sales at an ASP of USD73.9/t.

Higher fuel costs mean higher production costs
We revise our FY10F production cash cost ex. royalty target to USD54.7/t, taking into account the increase in fuel costs in 2Q10. In our view, the higher fuel costs will be sustained in the remaining quarters as BYAN has a high dependency on fuel since the distance from its mines to the port is a lengthy 339km on average. At the same time, we also adjust our capex target to incorporate an additional USD70mn of capex for jetty construction at Perkasa and overland conveyor construction at FTB.