● UT says that it is bidding for two mine-mouth power plants, located in South Sumatra and Riau. UT explained that this strategic move is to utilise the abundant reserves of low-ranked coal in Indonesia and, in return, to secure more mining contracts.
● We do not fully agree. Although the financial impact is likely to be neutral-to-slightly negative, we believe that a power plant is simply a totally different risk profile to its current business portfolio. UT’s guidance of around 12-15% IRR for the projects would be dilutive to its current ROCE of around 21%.
● In addition to weather-related issues, we expect its plan to invest in power plants to increase the share price uncertainties in the short term. We, therefore, expect the short-term underperformance to continue.
● We, however, maintain our OUTPERFORM rating on the company on valuations. The stock now trades at 13.4x FY11E P/E and EV/EBITDA of 7.1x, whereby both are trading at 8-10%
discount to the overall market.
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