CLSA Coal Sector Update

Share prices of Indonesian coal companies have done very well YTD. For sure the easy money has been made but looking at current valuation, Olie thinks companies have not factored in excessive coal price relative to spot price and long term price outlook. The demand picture on the horizon is solid with China alone looking to add 60GW of coal-fired generating capacity every year. Indonesia has been and will be the biggest incremental coal supplier globally but this vastly underpowered archipelgo also has big domestic demand from its 20GW PLN and 25GW indepentdent power projects. For now and probably for the next 5-10 years, coal remains one of the cheapest source to fire power generation capacity trading at 77% discount to crude at current respective spot prices. This massive discount to crude oil will likely narrow.

Key points from the report:
We try to estimate what thermal coal prices are implied in share prices of Indonesian coal companies. We use PE as a primary methodology and adopt 2010 earnings and then also use DCF to have a feel on what short-term and long-term coal price implied.

Based on these methods, Adaro Energy is implying US$63/t to US$75/t thermal coal price hence offering cheaper entry to its growth potential, while one with highest implied price is Indika and therefore is looking more expensive than others.

Catalysts for the sector include thermal coal price movement (likely to be volatile in the short-term as it is driven more by crude oil price and US Dollar movements rather than by physical demand for the commodity, though long-term outlook remains positive), and M&A in the sector with Berau up for sale. With most companies have already locked in most of their tonnage for this year, we do not expect much upside surprise on earnings for this year.

We therefore like Adaro, for its size, growth outlook, and diminishing risk profile, ITM, for its exposure to thermal coal price recovery and robust balance sheet, and continue to see some upside in Bukit Asam. Despite its excellent asset quality, we continue to be concern on Bumi corporate governance risk despite excellent coal assets, and think that Indika is expensive.

UBS Indonesia Market Strategy

More on consumption

Three data points to support upbeat outlook on Indonesia consumption
These data points are: better-than-expected unemployment data including Q109; increased M&A activity in Indonesian domestic companies; and continued growth in corporate capex spending in Q109. We selected three main consumption plays: Astra International (Astra), Bakrieland, and Media Nusantara Citra.

Astra International
Astra is our top pick. Its valuation looks attractive for domestic consumption exposure at 10x 2010E PE. The UBS 2010 forecast is 13% above consensus on better sales growth in the auto business. The company should also be the main beneficiary of a declining JIBOR rate, which could translate into a lower consumer lending rate.

Bakrieland
We pick Bakrieland for four reasons: 1) lower governance risk with an independent private equity firm as a majority shareholder; 2) lower mortgage rates which will likely boost its residential sales; 3) the completion of its toll road project; and 4) potential deregulation allowing foreigners to buy strata-title apartments post elections. Its balance sheet is strong with gearing of only 4%.

Media Nusantara Citra
Our last consumption selection is Media Nusantara Citra because of: 1) attractive low penetration of ad spend; 2) the ability of the company to regain the number one position in market share in 2009; and 3) valuation of 7x 2010E PE for a company that controls 30% of the TV ad spend share in Indonesia. A significant shareholder has also increased its stake in the company in recent years.

JP Morgan - Bakrieland Development; Higher alpha but lagged, raised PT to Rp500

Higher alpha but lagged: In the past, during the bottoming of the interest rate, ELTY share price had reached Rp700. We note that ELTY share price has the tendency to lag the share prices of Ciputra group companies. Finally, the alpha generated by ELTY tends to be higher than that of CTRA (note: in the past, during the property sector rally, ELTY’s and CTRA’s share prices had appreciated by 536% and 400%, respectively). Although ELTY share price has appreciated by 278.38% YTD FY09, we believe there could be more upside.

Trades at par with NAV when interest rate bottoms: Our NAV band chart analysis indicates that when interest rate bottoms, ELTY would trade at par with its NAV value. Currently, it trades at a 57% discount to its NAV value. With that, we believe there could be potential 132.5% upside from the current level if ELTY were to trade at par with its NAV.

We raise our PT to Rp500: We revisit our model for ELTY and incorporate following changes: (1) incorporate the lower-than-expected 1Q09 results; (2) lower our risk-free rate assumption from 13% to 11.5%; (3) incorporate the new assumption on the appreciation of property prices from Jones Lang Lasalle; (4) extend our PT time horizon from Dec-09 to Jun-10; and (5) lower the discount assigned to the Bakrie Group stock from 40% to 20%, These adjustments lead us to raise our SOTP-based Jun-10 PT from Rp250 to Rp500.

Maintain OW with new Jun-10 Rp500 PT: With the expectation of a narrower discount to NAV, we stay OW and assign a new SOTP-based PT of Rp500 to ELTY. Our PT is derived using a combination of NAV and DCF methods in which real estate development assets are valued using NAV, while operating assets are valued using DCF. On top of that, we assign a 20% discount to reflect the risk of investors’ wariness about Bakrie Group-related stocks. Risks to our PT: (1) ELTY’s cash holding is stripped out; (2) a delay in the interest rate cut by Bank Indonesia.

CIMB Ace Hardware Indonesia Company update - More reasons to cheer

(ACES IJ / ACES.JK, OUTPERFORM - Upgraded, Rp920 - Tgt. Rp1,050, Consumer)

We upgrade Ace to Outperform from Underperform with a new target price of Rp1,050 (from Rp740). Reasons for our upgrade are: 1) a more conducive macroeconomic environment given declining inflation; 2) higher bargaining power with suppliers, possibly leading to higher margins; and 3) a recovery in the construction sector. We have switched our valuation methodology back to single-step DCF (16.2% WACC, 6% LTG) from 2-step DCF previously. Following this and our earnings upgrade, our target price rises to Rp1,050, implying 12.8x and 10.6x CY09-10 core earnings respectively.

Mandiri Sekuritas Bumi Resources: Some key points from yesterday AGM and EGM (BUMI, Rp1,880/share, Neutral, TP: Rp1,820)

The company will pay dividend from 2008 profit amounting to Rp50.6/share (15% payout ratio) or equal to 2.6% dividend yield.

The EGM approved company plan to pledge its assets (including KPC, Arutmin, and Herald Resources) in order to obtain new loan. Orally, they mentioned that the maximum loan amount they are looking for is up to EBITDA figures (note that FY08 EBITDA was around US$1.2bn). The loan will be used for expansion on coal related businesses.

The company revised Fajar Bumi shares acquisition from 77% stakes to 50% stakes. For this 50% stakes, the company will pay around Rp1.4tn.

The company plans to regroup its business units by separating coalrelated and non coal business units.

BUMI is currently trading at PER09F of 7.5x, maintain Neutral recommendation.