Yesterday, Adani, regional government of South Sumatra, and PTBA signed a tripartite
head of agreement to build a railway from Tanjung Enim to Palembang and a coal terminal. The 250km railways will have 35mtpa capacity (expandable to 60mtpa) and the coal terminal will have 50mtpa handling capacity. This initial 30-year concession will require a US$1.65B investment and commence operation in FY14E (according to Adani).
The Adani project is among the four railway projects planned out of Tanjung Enim; hence this project is an addition to the current ones by PT. Kereta Api and Transpacific. The four railways are: (1) 22.7 MM tons railways of PT Kereta Api from Tanjung Enim to Tarahan – In operation and expansion. (2) 27MM tons railways of Transpacific (Rajawali) from Tanjung Enim to Tarahan – to start construction in late 1Q11. (3) Tanjung Enim to Bengkulu railway by Johannes Kotjo – stalled. (4) Adani’s 35MM tons railway from Tanjung Enim to Palembang – head of agreement signed.
At this point, we have yet to incorporate the Adani railway into our model, but potential upside to our PT is up to Rp25,000 while earnings for FY10E and FY11E should not be affected. My take – despite the share price spike yesterday, the stock is still an Underperformer YTD (-21% relative) and on 3M horizon (-10% relative). Valuation remains reasonable (compared to the long term EPS upside) on 14x FY11 P/E. A solid BUY at this level.
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