DBS PTBA A laggard no more

• Expanding railway capacity and new power projects will improve earnings visibility
• Near term catalysts are new acquisition and stronger 2H earnings
• Potential not reflected in current valuation; maintain Buy rating and Rp21,350 TP

Attractive entry point. PTBA’s recent share price weakness due to poor 1H earnings offers an attractive entry point as we believe upside from new railway and power projects have not been priced in. Execution risk is now lower following government support for railway spending, while the market has not priced in the latest development – increasing interest in investing in infrastructure projects in Indonesia. We expect strong 2H earnings and a potential new acquisition to be near-term catalysts for PTBA.

Improving earnings visibility. PTBA is the most resilient coal player in Indonesia, as the government has increased commodity-related infrastructure projects to accelerate Indonesia’s development plan. This would help PTBA to monetize its abundant coal reserves and raise coal output. PTBA’s plan to enter the power business will also provide the group with more resilient
earnings and steady cash flows than peers, and provide stable demand for 12-13m tons of coal (32% of FY14F total production). Its strong balance sheet with Rp4.2t
net cash in 1H10 would also provide upside from potential new acquisition.

Maintain Buy. PTBA is attractively priced at 12x FY11F PE on the back of FY09-14F net profit CAGR of 20%, supported by 26% p.a. output growth following improved logistics. We maintain our Buy call for PTBA and Rp21,350/share target price based on blended 13x FY11F PE and 4x PBV.