DBS Coal: Heating up

• Continuous rainfall may drive 4Q coal price higher
• Expect positive newsflow on M&A activities and infrastructure upgrade
• Attractive entry point - weak 2Q earnings priced into current valuations
• ADRO is our top pick for its solid production track record; reiterate Buy for PTBA and Hold for ITMG

Attractive entry point. Share prices of Indonesian coal stocks grew 10% on average in 3Q but under-performed the IDX by an average of 11% due to (i) weak 2Q10
earnings, (ii) flat coal prices, and (iii) delay in M&A announcement. At 13xFY11 PE for 15% FY09-12 net profit CAGR, we believe the weak 2Q earnings have been priced
in, while 2H and FY11F earnings growth are intact with output and ASP growth from new mines and infrastructure improvements. We expect M&A activities to be near term
catalysts, with potential upside from higher coal prices led by stronger 4Q demand and heavy rainfall.

Higher coal prices if heavy rainfall continues. The Indonesian Meteorology, Climatology and Geophysics Agency forecasts the wet weather in Sumatera and Kalimantan areas will last till Oct 2010. Production
shortfall due to heavy rainfall will support coal prices as Indonesia contributes 30% of total seaborne trade. We expect coal prices to trade at a higher range of US$95-US$100/ ton in 2H10 (US$94 average over the last 3 months), supported by stronger 4Q winter demand and rising domestic demand from newly built power plants.

Poised for new acquisitions. Healthy balance sheets (net cash for PTBA and ITMG; 0.3x net gearing for ADRO) support longer term production growth. We expect positive newsflow on M&A activities as ADRO is in talks to acquire Bhakti Energy Persada (BEP), which belongs to one of its shareholders, and PTBA is eyeing two coal assets in Kalimantan. Delays in the acquisition plans could lead to higher dividends to shareholders.

Maintain Buy for ADRO and PTBA. Maintain Buy for ADRO for resilient output growth and large asset base. PTBA is a long term Buy for its attractive growth prospects from logistic de-bottlenecking. Maintain Hold for ITMG as slow progress of its acquisition plan could hamper future growth
prospects. Current valuation is also not reflective of the long-term risks of its depleting reserve.