Credit Suisse ITMG, What if coal price stays lower for longer?

PT Indo Tambangraya Megah (ITMG.JK, Rp9,800, O, TP Rp17,000) - What if coal price stays lower for longer?

Paworamon (Poom) Suvarnatemee, CFA / Research Analyst / 662 614 6210 / paworamon.suvarnatemee@credit-suisse.com

We have evaluated the downside risks to ITMG’s earnings and valuation, in case coal prices continue to stay low or fall even lower than the US$75/tonne price in FY10.

Risks to our FY09 forecast are low, as 70% of ITMG’s volumes have already been priced. Risks are higher in FY10, as the volumes are yet to be priced. We see 51% earnings downside from our forecast, if benchmark prices fall to US$75/tonne in FY10 (from the current assumption of US$100/tonne). At US$50/tonne benchmark, ITMG would be making loss, unless costs are cut by 10%.

We doubt that benchmark price would fall as low as US$50/tonne, given that major Indonesian players would lose money. Cash cost of Russian producers are also believed to be in the range of US$60/tonne.

We maintain our OUTPERFORM rating. Even with the flat coal price at around US$75/tonne in FY10, its P/E is still undemanding at 7x and free cash flow remains positive. We see its net cash position, and willingness to pay dividend, as a cushion to share price. Our forecast is revised down slightly, reflecting small change in price assumptions.