Bahana Outlook on PT Tambang Bukit Asam Tbk (PTBA IJ): Lower, but still most preferred

Coal: Indonesia
Arandi Ariantara (arandi@bahana.co.id)

Rating: BUY (Unchanged)
Target price: IDR7,800 (unchanged)
Share price (9-May-16): IDR6,500

§ Cutting 2016F earnings on margin contraction: As COGS growth outstripped top line growth, PTBA reported disappointing 1Q16 net profit, -37% q-q (-3% y-y), reflecting just 15% of our and 21% of the consensus full-year estimates. With 1Q16 COGS jumping 33% q-q and 9% y-y, we cut our 2016F earnings by 6%, partly reflecting current stronger IDR and higher total railway and mining services cost of IDR329,300/mt, up 0.2%. Note that in 1Q16, the proportion of railway services cost to total costs escalated from 25% in 1Q15 to 35%, reflecting higher sales volumes.

§ Strip ratio jumped 38% q-q to 5.57x while ASP dropped 6% q-q: The 1Q16 strip ratio (SR) jumped 38% q-q to 5.57x, mirroring 1Q15’s SR of 5.59x, although management maintains their 2016 SR target of 4.5x, lower than our estimate of 5.0x. The 1Q16 average selling price was down 6% q-q and 5% y-y to IDR664,289/mt on weak global coal price which came off 18% y-y to 1Q16 average price of USD50.8/MT.

§ Coal production down 39% q-q, railway transport up 19% q-q: PTBA booked 1Q16 coal sales of 5.23m mt, up 10% q-q and 14% y-y, of which 56% or 2.91m mt, were sold locally, up 12% q-q and 34% y-y. 1Q16 coal production plunged 39% q-q to 3.2m mt while railway transport was up 19% q-q to 4.3m mt.

Outlook: 8% y-y higher DMO demand to support PTBA sales volumes
Coal-fired power plants function as base loaders to generate electricity, enabling PTBA’s coal sales volumes to move in tandem with PLN’s electricity sales (exhibit 6). The Energy and Mineral Resources Ministry (ESDM) expects the 2016 domestic coal demand to rise 7.7% y-y to 86m mt, following PLN’s target of 6% y-y electricity growth to 226TWh on improved economic conditions. Management estimates that every 1MW increase in capacity will add IDR1bn in revenue/annum.

Recommendation: Reiterate BUY and IDR7,800 TP on resilient growth
At this stage, PTBA remains as our top pick in the sector. We retain our BUY call and 12M IDR7,800 TP (DCF-based, 19% WACC) on PTBA despite 5-6% cut in 2016-17F earnings (exhibit 5). Beyond 2017, PTBA’s earnings should be supported by power-plant projects (exhibit 9) and higher local coal demand (exhibit 18), allowing for continued market outperformance (exhibit 4) in our view. Risks: Slower economy/ electricity project delays.

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