Coal Sector

Sector Update
Report date Sector Rating 15-Dec-10 Mining Overweight

Bonanza Years Not Over

We adjust our assumption on average selling price for coal producers under our coverage based on recent increase in global coal price. Our new assumption for average global coal price is at US$95/ton and US$100/ton for 2011F and 2012F with long term assumptions at US$90/ton. Our previous assumptions are US$80/ton, US$85/ton and US$85/ton respectively. Despite stronger demand from overseas market, we also see potential of higher demand from domestic market on the back of strong and resilient Indonesia economic growth. These new assumptions increased our target price on companies under our coverage and we still maintain our overweight stance on coal sector.

Target Price Companies Bumi Resources Adaro Energy TB Bukit Asam Indo Tambangraya Ticker BUMI ADRO PTBA ITMG Price (Rp) 2,975 2,550 Target Upside Price Potential (Rp) 3,550 3,000 (%) 19.3 17.6 15.8 -9.5

21,150 24,500 50,700 45,900

Valuation Matrix Companies Bumi Resources Adaro Energy TB Bukit Asam Indo Tambangraya Rec Buy Buy Buy Sell Price (Rp) 2,975 2,550 21,150 50,700 PER 2011F 14.1 12.9 15.9 16.0 2012F 12.1 10.4 13.7 11.1 EV/EBITDA 2011F 5.6 6.3 10.4 9.9 2012F 4.9 5.0 8.6 6.6

Thermal coal is still the cheapest alternatives that meet three key requirements for power, which are availability, accessibility and acceptability Recently, thermal coal price has gone up to US$115.8/ton, which is 34.3% YTD higher than US$86.3/ton early this year. Such increase is backed by several factors, in particular, optimism on economic recovery and higher oil price. Based on its characteristic, coal is the cheapest alternatives for non renewable energy based power plants. Coal is relatively easy in handling and energy generated by 250kg of coal is equal with 1 barrel of oil.

Higher demand from China, India and Indonesia Drivers for thermal coal demand is still from Asia, beside known strong demand from India and China next year, we spotted potential strong demand from one of worlds biggest thermal coal exporter, Indonesia. Indonesia demand for thermal coal is set to grow by 21.5% YoY in 2011F derived from Government coal DMO of 79.0mn tons next year compared to 55.8mn tons this year. PLN consumes around 70.6% of the DMO in order to produce electricity for Indonesia. Given faster economic growth pace, the state electricity company required to provide an additional 16,477 MW sequentially until 2014F. This means that total PLN consumption for thermal coal will reach 95.3mn tons in 2014F.

Higher demand from the world largest coal exporter will boost price Domestic coal production growth rate in the last two years was only at 7.2% with total production reached 335.3mn tons in 2009. As of 9M10, total coal produced in Indonesia was only at 260mn tons which indicated a relatively flat growth for 2010F. Given the picture of strong consumption growth and current condition in production output, Indonesia will affect worlds coal market, hence, price. EIA figures out that Indonesia stood at second largest coal exporter after Australia.

Bagus Hananto bagus@nispsekuritas.com 62-21-8379 5238 ext.7311

Adjusting our assumptions on coal price by 18.8% Given such condition, we revised up our average benchmark assumption to US$95/ton for 2011F and US$100/ton for 2012F and long term assumption at US$90/ton from US$80/ton, US$85/ton and US$85/ton respectively. We still maintain our assumptions conservative as price is likely to exit its rapid upward trend and normalize in 2Q11. As an impact, there are earnings revisions to our coverage based on higher coal price assumptions. Bumi Resources will obtain most benefit of the higher coal price, as the companys ASP is the most sensitive to global coal price movement. We also still maintain our buy stance on Adaro and TB Bukit Asam.

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Coal Sector
Coal is still the cheapest alternatives. Recently, thermal coal price has gone up to US$115.8/ton, which is 34.3% YTD higher than US$86.3/ton early this year. Such increase is backed by several factors, in particular, optimism on economic recovery and higher oil price. Based on its characteristic, coal is the cheapest alternatives for non renewable energy based power plants. Coal is relatively easy in handling and energy generated by 250kg of coal is equal with 1 barrel of oil. Hence, with current oil price that hovers at US$88/barrel, rough calculation for thermal coal power plants is only a quarter of that amount to produce similar energy generated by a barrel of oil. It is known that gas is also cheap alternatives, but its handling is not simple as pipe infrastructures requires additional space and land clearance, also earthquake may affect gas based power plants. Higher demand from China, India. Drivers for thermal coal demand is still from Asia, beside known strong demand from India and China next year, we spotted potential strong demand from one of worlds biggest thermal coal exporter, Indonesia. Such strong demand is easily spotted from recent robust production expansion conducted by coal producers in Indonesia, which is driven by the countrys strong economic growth that boosts higher demand for electricity, hence, thermal coal. .and Indonesia. Indonesia demand for thermal coal is set to grow by 21.5% YoY in 2011F derived from Government coal DMO of 79.0mn tons next year compared to 55.8mn tons this year. PLN consumes around 70.6% of the DMO in order to produce electricity for Indonesia. Given faster economic growth pace, the state electricity company required to provide an additional 16,477 MW sequentially until 2014F. This means that total PLN consumption for thermal coal will reach 95.3mn tons in 2014F. With 70.6% coal consumption to DMO, the figure translates into a roughly 135mn tons of DMO in 2014F, 141.9% higher compared to 55.8mn tons in 2010F or 24.7% CAGR during 2010 2014F periods. Exh. 1: Indonesia GDP Electricity, Gas & Water Supply
14 12 10 Rptn 8 6 4 2 0
ar -0 0 ar -0 1 ar -0 2 ar -0 3 ar -0 4 ar -0 5 ar -0 6 ar -0 7 ar -0 8 ar -0 9 M ar -1 0 M

Source: Bloomberg

Higher demand with moderate production growth will boost coal price. At the same time, domestic coal production growth rate in the last two years was only at 7.2% with total production reached 335.3mn tons in 2009. As of 9M10, total coal produced in Indonesia was only at 260mn tons which indicated a relatively flat growth for 2010F. Given the picture of strong consumption growth and current condition in production output, Indonesia will affect worlds coal market, hence, price. EIA figures out that Indonesia stood at second largest coal exporter after Australia.

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Coal Sector
Exh. 2: Domestic Power Plant Program
Thermal Power Plant Suralaya Indramayu Rembang Paiton 7 Lontar Pelabuhan Ratu Pacitan Cirebon Paiton 3 Tanjungjati B 3 - 4 Celukan Bawang Tanjung Awar - Awar Adipala Central Java Meulaboh Pangkalan Susu Tarahan Simpang Belimbing Pesisir Sumbar Riau Banjarsari South Sumatera 2 Mine Mouth South Sumatera 1 Mine Mouth Riau 1 MW 625 900 630 660 945 1,050 630 660 815 1,320 130 700 660 2,000 200 840 200 227 224 200 200 225 300 300 Schedule 2010 2010 2010 2010 2011 2011 2011 2011 2012 2012 2012 2012 2012 2012 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 2010 - 2014 Thermal Power Plant Asam - Asam Pangkalan Bun New Kaltim Pulang Pisau Muara Jawa New Kalsel North Sulawesi 2 Gorontalo Molotabu North Sulawesi 1 Kotamobagu Barru South Sulawesi 1 Talakar 1 Talakar 2 MW 130 14 250 120 200 200 50 62 20 50 40 100 200 200 200 Schedule > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014 > 2014

Source: PLN

Higher coal price suggests upward revision in assumption. In addition to that, recent disruption in Indonesia capability to produce coal amid heavy rain and latest news that similar condition also occur in Australia, had boosts coal price to soar above US$100/ton. This has brought average coal price to US$115.8/ton, or already above our 2011F assumption at US$85/ton. Given such condition, we revised up our assumption on average benchmark to US$95/ton for 2011F and US$100/ton for 2012F and long term assumption at US$95/ton from US$80/ton, US$85/ton and US$85/ton respectively. As an impact, there are earnings revisions to our coverage based on higher coal price assumptions. Maintain overweight. Our adjustment on average benchmark price is conservatives given coal price characteristic. Historically, coal price went up during year end until 1Q each year. Overall, we still maintain our overweight stance on this sector as thermal coal is still the cheapest alternatives for non renewable energy based power plant. Recent unfriendly weather condition is also an advantage for coal price despite it occur to be temporarily. Exh. 3: Coal Producer ASP Sensitivity
110.0 100.0 90.0 80.0 70.0 60.0 50.0 40.0 4Q09 1Q10 Coal Newcastle
Bloomberg; companies

ITMG BUMI PTBA ADRO

2Q10 ADRO PTBA

3Q10 ITMG

4Q10 BUMI

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Coal Sector
Bumi Resources (BUMI, Rp2,975, Buy, TP : Rp3,550) Strong production growth. Bumi Resources is the largest coal producers in Indonesia with total production reached 55.6mn tons last year or 16.6% to total Indonesia coal production. Bumis capability to boost coal production is backed by adequate infrastructure that supports its mining activities. Revise up earnings by 38.5% next year. Bumi also proven to obtain benefit from higher coal price as the companys ASP structure is sensitive to global coal price movement. Hence, the revision on global coal benchmark and more lower interest rate expense from recent debt reduction program affect our earnings forecast by 38.5% and 30.8% in 2011 and 2012F to US$474.1mn and US$549.5mn respectively on the back of higher ASP at US$75/ton and US$82/ton. Strong catalyst from Japan. We foresee the near term catalyst is selling price settlement to Japan where this year Bumi Resources managed to obtain ASP at US$105/ton in early 2010, or 11.1% above monthly average benchmark price that stood at US$94.5/ton during 1Q10 period. Buy. Thus, the new assumptions raised our target price on Bumi Resources to Rp3,550/share from Rp3,000/share currently. Thus with 19.3% upside potential we maintain our buy stance on Bumi Resources that currently traded at 2011F PER of 12.5x and EV/EBITDA of 5.1x. Bumis ASP is also the most sensitive to global coal price. This is derived from quantitative analysis that showed an r2 value of 99.6. Exh. 4: BUMIs Financial and Valuation Metrics
Year-end 31-Dec Revenue (US$mn) Net profit (US$mn) EPS (Rp) EPS growth (%) DPS (Rp) Dividend yield (%) P/E Ratio (x) EV/EBITDA (x) Return on Equity (%) Net Gearing (%) 2008 3,378 372 178 -52.9 51 1.7 16.7 6.2 32.5 94.4 2009 3,219 190 91 -48.8 22 0.7 32.6 12.7 14.4 220.0 2010F 3,716 294 131 43.7 34 1.1 22.7 8.1 16.6 131.8 2011F 4,934 474 212 61.6 55 1.9 14.1 5.6 20.9 92.4 2012F 5,563 550 245 15.9 64 2.2 12.1 4.9 20.5 71.5

Source: Company data and NISP Sekuritas

Adaro Energy (ADRO, Rp2,550, Buy, TP : Rp3,000) Adaros ASP would also benefit from higher benchmark coal price. This would also be added by the companys ability in increasing production next year. Given current average coal price that has risen by 24.1% YTD we foresee the companys ASP to increase by 14.4% next year to around US$70/ton. Robust coal price would also helps some of Adaros sales price that conducted under index link scheme. Our assumptions on ASP increased our forecast on the companys earnings to Rp6.37n and Rp7.9n in 2011F and 2012F or higher by 18.9% and 16.4% respectively. Thus with the new assumptions, we revised up our target price on Adaro to Rp3,000, presenting 17.6% potential upside or 2011F PER 15.2x and EV/EBITDA of 7.3x. We like Adaro for its growth capability and the companys higher ASP will overcome Adaros recent increase in costs.

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Coal Sector
Exh. 5: ADROs Financial and Valuation Metrics
Year-end 31-Dec Revenue (Rpbn) Net profit (Rpbn) EPS (Rp) EPS growth (%) DPS (Rp) Dividend yield (%) P/E Ratio (x) EV/EBITDA (x) Return on Equity (%) Net Gearing (%) 2008 18,093 887 28 902.0 12 0.0 91.9 18.8 11.0 4.0 2009 26,938 4,367 137 392.0 27 1.0 18.7 8.1 28.0 11.0 2010F 25,690 2,700 84 -38.0 17 1.0 30.2 11.9 15.0 6.0 2011F 34,653 6,331 198 135.0 39 2.0 12.9 6.3 31.0 14.0 2012F 41,639 7,856 246 24.0 48 2.0 10.4 5.0 31.0 16.0

Source: Company data and NISP Sekuritas

TB Bukit Asam (PTBA, Rp21,150, Buy, TP : Rp24,500) Control largest reserves in the island. Sumatera possesses a huge coal resource where TB Bukit Asam alone controls approximately 7.29bn tons of coal resources with 1.99bn tons of coal reserves. This is equal to 29.4% of total coal reserves in Indonesia which is currently at 6.76bn tons. The companys long term project will enable TB Bukit Asam to access such abundant reserves where total production is aimed to reach 94.7mn tons per annum from current production rate of around 14mn tons per annum. Less exposed to global price movement. The company might not have full capability to enjoy higher benchmark coal price as a half of sales volume is allocated for PLN. However, the remaining balance is exposed to higher ASP and there is also possibility that PLN and TB Bukit Asam would adjust up their sales price agreement this year. Buy. We incorporate new ASP for TB Bukit Asam of Rp750,000/ton, 2.7% higher than our current assumption of Rp730,000/ton. As an impact, forecast on the companys earning increased by 5.4% and 3.5% for 2011F and 2012F. This has increased our target price on TB Bukit Asam to Rp24,500 from Rp22,000. Thus we still maintain our Buy stance on the counter. Exh. 6: PTBAs Financial and Valuation Metrics
Year-end 31-Dec Revenue (Rp bn) Net profit (Rp bn) EPS (Rp) EPS growth (%) DPS (Rp) Dividend yield (%) P/E Ratio (x) EV/EBITDA (x) Return on Equity (%) Net Gearing (%) 2008 7,216 1,708 741 124.6 371 1.8 28.5 18.0 50.2 net cash 2009 8,948 2,728 1,184 59.7 592 2.8 17.9 12.2 56.2 net cash 2010F 8,628 1,901 825 -30.3 412 2.0 25.6 17.6 31.8 net cash 2011F 11,299 3,071 1,333 61.6 666 3.2 15.9 10.4 42.1 net cash 2012F 13,152 3,548 1,540 15.5 770 3.6 13.7 8.6 37.9 net cash

Source: Company data and NISP Sekuritas

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Coal Sector
Indo Tambangraya Megah (ITMG, Rp50,700, Sell, TP : Rp45,900) ASP to increase inline with global price. ITM will also enjoy higher coal price benchmark as its ASP is sensitive to coal price movement. The company managed to post higher ASP at US$78.3/ton in 3Q10, higher than US$66.6/ton booked in 1Q10. The increase was significant compared to average global coal price condition that relatively unchanged during 3Q10 at US$94.0 vs US$94.5/ton in 1Q10. Backed by strong ASP in 2Q10 and 3Q10, the company managed to narrow the gap in 9M10 ASP at US$73.9/ton or only 1.7% YoY lower compared to US$75.2/ton a year earlier. In 1H10, ASP was still 2.6% YoY lower at US$72.0/ton. Maintain sell. As such, based on our new global price assumption, we adjust our assumption on ITMs ASP to US$77/ton in 2011F and US$85/ton in 2012F. We also revised up our target price on ITM to Rp45,900/share from Rp42,000/share. However, the companys current share price is already reflects such potential, hence, we still maintain our sell recommendation on ITM. Exh. 7: ITMGs Financial and Valuation Metrics
Year-end 31-Dec Revenue (Rpbn) Net profit (Rpbn) EPS (Rp) EPS growth (%) DPS (Rp) Dividend yield (%) P/E Ratio (x) EV/EBITDA (x) Return on Equity (%) Net Gearing (%) 2008 1,317 235 1,556 324.0 1,344 2.7 32.6 19.9 38.5 net cash 2009 1,508 336 2,223 43.0 1,964 3.9 22.8 15.1 42.6 net cash 2010F 1,610 306 2,024 -9.0 1,215 2.4 25.0 15.6 33.8 net cash 2011F 1,998 479 3,172 57.0 1,903 3.8 16.0 9.9 39.9 net cash 2012F 2,463 689 4,564 44.0 2,739 5.4 11.1 6.6 43.0 net cash

Source: Company data and NISP Sekuritas

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Coal Sector
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Research Team
+62 21 83795238 Bagus Hananto Lyana Margareth Ariawan Yuni Pratiwi Head of Research Equity Analyst Fixed Income Analyst Research Assistant bagus@nispsekuritas.com lyana.margareth@nispsekuritas.com ariawan@nispsekuritas.com yuni.pratiwi@nispsekuritas.com Ext 7311 Ext 7327 Ext 7711 Ext 7338

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Rating Definitions
BUY : HOLD : SELL : We expect this stock to give total return of above 15% over the next 12 months. We expect this stock to give total return of between -15% and 15% over the next 12 months. We expect this stock to give total return of -15% or lower over the next 12 months.

DISCLAIMER:
This report was produced by PT NISP Sekuritas, a member of the Indonesia Stock Exchange (IDX). The Information contained in this report has been obtained from public sources believed to be reliable and the options, analysis, forecasts, projections and expectations contained in this report are based on such information and are expressions of belief only. No representation or warranty, express or implied, is made that such information or opinion is accurate, complete or verified and it should not be replied upon as such. This report is provided solely for the information of clients of PT NISP Sekuritas who has to make their own investment decisions without reliance on this report. Neither PT NISP Sekuritas nor any officer or employee of PT NISP Sekuritas accept any liability whatsoever for any direct or consequential loss arising from any use of this report or its contents. PT NISP Sekuritas may be involved in transactions contrary to any opinions herein to make markets, or have positions in the securities recommended herein. PT NISP Sekuritas may seek or will seek investment banking or other business relationships with the companies within this report. This report is a copyright of PT NISP Sekuritas. For further information please contact our number 62-21-83795238 or fax 62-21-83795240.

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