Coal sector 30-05-17 - DBS Bank reserves. Indonesia coal reserves stood at only 7.3bn-8.3bn tons in 2015, which are only 30%-40% of the 2014 level of 32bn tons. Moreover, the 1Q17

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

Cruising ahead

Reiterate our coal price benchmark of US$65 per

ton

Coal miners are still reluctant to raise output

China’s proactive supply control caps downside

BUY calls for ITMG and ADRO

Reiterate our coal price benchmark to US$65 per ton. We reiterate our long-term thermal coal benchmark price to US$65 per ton in 2017 and beyond. Despite the slower-than-expected supply reaction toward seasonally high coal prices at US$80 per ton level in 1Q17, going forward, we think China’s proactive supply control will keep coal prices in the range of US$65-US$75 per ton to benefit both domestic coal miners and power plant operators.

Coal miners are still reluctant to raise output. Beyond the seasonal low coal output in 1Q17, due to weather, seaborne thermal coal exporters (mainly from Indonesia) are still reluctant to react swiftly to the coal price uptrend so far. This will help to prevent coal price drop on excess supplies. Indonesia’s largest coal miners are still aiming for flat to single-digit production volume growth this year; while smaller miners are facing difficulties in securing financing from financial institutions to purchase machineries and restart their mines.

Indo coal stocks: Trading at attractive valuation post

share price correction. Given that the Indonesian coal stocks corrected 30% in May, we believe that currently it is a good entry point for coal stocks in light of the positive earnings growth prospect on the back of steady coal prices outlook. Moreover, Indonesian coal stocks are still trading at single-digit PEs. ADRO and ITMG are our top BUYs. Our top BUYs are ADRO and ITMG for their track record in delivering strong EBITDA per ton in various coal price cycles. We like ADRO for its low cost-centric operational strategies which will benefit hugely from the coal price uptrend. We like ITMG for its steady dividend stream and remaining coal reserves of nine years. We also have a BUY rating for PTBA as its lower mining contractor services fee will help boost its margins.

JCI : 5,712.30

Analyst William Simadiputra +62 2130034939 [email protected]

Adaro Energy : Indonesia second largest coal producer. It also has subsidiaries that operate in the mining contracting, barging and ship loading business

Indo Tambangraya Megah : One of the largest coal mining company Banpu. Coal consession located in Kalimantan, Indonesia

Tambang Batubara Bukit Asam : Indonesia largest coal miners with 1.99bn ton of coal reserves. Main coal mining concession located in Tanjung Enim, south Sumatera

Qinghuangdao port’s historical coal price trend

Source: Bloomberg Finance L.P, DBSVI

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DBS Group Research. Equity 30 May 2017

Indonesia Industry Focus

Thermal coal sector

Refer to important disclosures at the end of this report

STOCKS

12-mth

Price Mkt Cap Target Performance (%)

Rp US$m Price Rp 3 mth 12 mth Rating

Adaro Energy 1,465 3,529 2,100 (13.8) 110.8 BUY Indo Tambangraya 15,800 1,344 20,500 (6.0) 79.6 BUY Tambang Batubara 10,725 1,856 16,000 (2.7) 60.7 BUY

Source: DBSVI, Bloomberg Finance L.P. Closing price as of 29 May 2017

Pro longed over supplies coal market, dragged coal price

Chinese government intervene domestic coal production

Post price spiked, production days relaxation introduced to cooling down the market

Industry Focus

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Reiterate our coal price benchmark to US$65 per ton

Reiterate our coal price benchmark to US$65 per ton in 2017 and beyond, as we believe China’s proactive domestic supply control will curb any potential excess supply in the market, thus limiting the coal price downside. China’s supply control is positive for China domestic and global coal prices, given that China is a primary market for global coal producers. The domestic supply dynamics will also impact its coal imports, in view of the fact that China will only import coal in the event of supply shortage. Newcastle coal price trend

Source: Bloomberg Finance L.P, DBSVI As China accounts for half of global coal consumption and production, it has the power to influence global coal supply- demand dynamics and coal prices via its domestic policies mainly via coal production control. Soft global coal supply addition in the past three years has also strengthened China’s position as a global coal power house. The Chinese government also controls the country’s largest coal producers such as China Shenhua Corp and China National Coal Group. Both account for around 20% of China’s national total coal output. Proportion of China supply and demand vs the world

Source: Bloomberg Finance L.P, DBSVI Supplies outside China seem to have reacted slowly to the higher coal price trend. Besides the rainy season in 1Q17, we

also see limited supply expansion from the major coal producing countries such as Indonesia – which will also provide a short term to medium-term cushion to coal prices. So far, Indonesia’s domestic coal miners are still conservative on their production volume expansion target and overall mining expansion strategy, which means that we will not see any excess supply from the seaborne market going to China, which could dilute the impact of its production volume intervention. China production control implies long-term coal price

band of US$65-75 per ton China will proactively manage coal supplies via maintaining its coal miners’ working days at 270-330 days to keep China’s domestic coal supply under control and to prevent excess supply. We believe such policies will keep the long-term coal price at US$65-75 per ton, which offers a win-win situation for both coal miners and coal-fired power plant operators. This could ultimately benefit China as a whole in view of the lower default risk for local coal miners and the availability of reasonably priced coal to fulfil the country’s energy demand. Qinghuangdao port’s coal price historical trend

Source: Bloomberg Finance L.P, DBSVI China’s decision to intervene on the supply side when coal prices hit a low of US$50 per ton last year shows that China was not comfortable with the emerging systemic default risk confronting its local miners. Moreover, the Chinese government also relaxed the coal production day limit to 330 days after coal prices spiked to above US$85 per ton in December last year. Besides the proactive supply controls mentioned above, China’s largest coal miners such as China Shenhua Corp and China National Coal Group Corp have also inked coal contracts with major coal power plant generators such as China Huadian Corp and State Power Investment Corp at around Rmb550-600 per ton, or US$77-84 per ton.

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Pro longed over supplies coal market, dragged coal price

Chinese government intervene domestic coal production

Post price spiked, production days relaxation introduced to cooling down the market

Industry Focus


Coal miners are still reluctant to raise output Besides China’s production control, slower-than-expected coal supply expansion from the major seaborne markets (mainly from Indonesia) could also help sustain coal prices at the current level of US$75-80 per ton in the short term. The low confidence among coal miners has led to slower-than-expected coal supply ramp-up and rebalancing of coal prices. Moreover, aggressive cost cutting in the past three years has also hurt global coal reserves. Indonesia coal reserves stood at only 7.3bn-8.3bn tons in 2015, which are only 30%-40% of the 2014 level of 32bn tons. Moreover, the 1Q17 rainy season hampered production in both Australia and Indonesia, keeping coal prices at above US$80 per ton on the back of supply shortage, despite the end of seasonal restocking in January. Historically, the first quarter has the lowest production volume due to the rainy season. The rainy season translates into lower productivity and production volume for coal miners. The chart below shows the quarterly production trends of ITMG, ADRO, PTBA and HRUM, with the first quarter usually being the lowest production volume period before production gradually ramps up in the remaining quarters towards meeting the companies’ full-year targets. The production trend is also supported by the demand trend, where the coal demand historically is the strongest in 4Q due to winter restocking, on the back of higher power plant utilisation during the winter season. Quarterly production trend (mn tons)

Source: Companies, DBSVI *2011-2014 figures are average quarterly coal output

However, we believe the tighter-than-expected supply goes beyond seasonal factors. Listed coal miners tend to maintain their conservative stances on coal production volume. Most of them have agreed to a higher strip ratio, possibly due to the brighter coal price outlook. A higher strip ratio means that the miners can minimise the risks to its remaining reserves as they do not need to achieve a lower cost structure, which is required in a low coal price environment. On the other hand, the production volume among the largest listed coal miners, such as

ADRO and ITMG, has remained flat this year. Meanwhile, PTBA’s production volume is subject to its railway capacity development this year. Pamapersada’s strip ratio and coal production volume

Source: Bloomberg Finance L.P, DBSVI Our surveys with a number of smaller coal miners in Indonesia have also revealed that they are skeptical on the how current coal price level could sustain going forward. Furthermore, the smaller coal miners continue to operate defensively in order to avoid heavy exploitation of their mining assets. Moreover, their operational flexibility will also be inferior to that in previous years, given that their efficiency has hit the limit and their thinning reserves pose future operational challenges. Moreover, the smaller coal miners faced difficulties in securing financing from the banks, which are still in the midst restructuring non-performing loans (NPL) and are reluctant to offer new financing packages to the new miners. Banks have reduced their exposure to the mining-related sectors in view of the rising NPL. Our survey suggests that the banks are still reluctant to offer credit to mining players. Loans to mining-related sectors and NPL trend


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Industry Focus


The lack of financing also means that the miners could not secure machinery and equipment to restart their mining activity. UNTR’s machinery sales volume was relatively low in 4Q16 and 1Q17 despite the coal price uptrend (see chart). UNTR is aiming for 2,700 units (23% y-o-y) of machinery sales in 2017 despite the improving coal price volume outlook. UNTR’s relatively soft machinery sales volume performance means there is not much capital redeployment to the sector. UNTR’s monthly machinery sales

Source: Bloomberg Finance L.P, DBSVI All in all, Indonesia targets a 2017 coal production of 413m tons, slightly lower vs. the 2016 level, according to the Ministry of Energy and Mineral Resources (ESDM). The government’s target is in line with that of Indonesia’s largest coal miners. Since all miners need to submit their one-year mining plan (that is subject to revisions) to the government annually, we can see that there is no significant production expansion among the Indonesian miners. Indonesia annual coal output

Source: ESDM, DBSVI Indonesia will be the largest coal consumer and net importer in the world, once the 35,000MW power plant project comes online in 2019-2020. According to Price Waterhouse Cooper (PWC) study, such a potential surge in demand could result in

Indonesia running out of coal reserves by 2030, as Indonesia’s remaining coal reserves stood at only around 8bn tons in 2015. This is only 40% of the average estimated reserves in the previous three years, due to the limited exploration activities on capital spending scale-back and aggressive cost cutting via lowering the strip ratio to below the optimum concession long-term strip ratio target. Slow production also seen in other countries Cyclone Darby could hurt Australia’s national production by 10%, given the disruption in railway transportation and overall mining activities. Meanwhile, the lower Australian coal tonnage could not be offset by the production of the closest alternative coal producing countries such as Indonesia whose local miners have chosen to stick to a defensive strategy, as highlighted previously. Other coal producing countries in the world are also not adding much to global production capacity, given the capital constraints and limited operational flexibility as a result of their aggressive cost-cutting efforts in the past two years to cope with the lower coal price trend. Apart from the lower fuel cost on the back of the lower global crude oil price trend, global coal miners have also successfully reduced their cash cost to another record-low level in 2015-2016 via reducing their hauling activities and lowering their strip ratio, which come at the price of reserves depletion. Mining activities in the post-low price crisis period may be different for some miners given that a meaningful part of their reserves has become hardly mineable and needs further rehabilitation efforts, such as removing the pile-up of overburdened soil in mining concessions – which arises due to the shortening of overburdened hauling distance to reduce cost. In the past two years, miners have focused on delivering strong earnings to shareholders, even amid weak coal prices – in the same vein of the Indonesian coal miners that we highlighted previously. Global cash cost per ton changes (2015)

Source: Company, DBSVI

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Industry Focus


Plans to cap global pollution are rolling out

The Paris and Cancun agreements will track the reduction of coal-fired power plant capacity over the next decade in order to achieve the desired lowering of carbon emission and global temperature. The agreements strive for zero emission in the long term, which translates into a zero coal-fired power plant target to maintain the desired global temperature (see chart). World emission scenario according to both agreements

Source: Climate Analytics, DBSVI The global shift to cleaner and more efficient energy sources is happening. Coal is always thought as the dirtiest energy source that has led to various pollution problems in many countries, particularly China. Developed countries like EU nations and the US have shifted away from coal due to environmental concerns. Going forward, we expect this trend to continue with the introduction of more efficient coal-fired power plants and renewable energy sources. Southeast Asia and East Asia (mainly China) have the largest coal-fired power plant capacity in the world. Both regions also will be the key market for thermal coal mines in the next decade, given the ongoing power plant capacity under construction. Beyond Asia, only the US has a meaningful coal- fired power plant capacity, but going forward we believe this will be gradually replaced by cleaner energy sources, as there is no material coal-fired power plant capacity under construction.

Global coal-fired plant capacity

Source: Greenpeace ‘Boom & Bust 2017’, DBSVI Still in demand: Coal is a reliable and affordable energy Despite the intention to cease coal in our energy mix in the long term, we cannot deny that coal is one of the most reliable and affordable power sources. This has enabled coal-fired power plant to achieve the widest coverage and highest energy mix in a large part of the world, mainly developing countries. Coal generates the lowest cost per kWh vs. other energy sources such as natural gas and diesel fuel, despite the former’s higher carbon emission. Rp per kWh

Source: PLN, DBSVI We do not deny that China is gradually shifting away from coal, but the IEA is forecasting that China’s coal consumption will still increase by 2.6% y-o-y until 2019, or an annual growth of 100m tons. In its World Energy Outlook 2015, the IEA also believes that China will remain the coal giant in terms of being both the producer and consumer until 2030. New coal-fired power plants are expected to enter the pipeline and the existing China power plants are relatively new vs. their useful life of 40-60 years and it is unlikely that the coal-fired power plants will cease operation before hitting their salvage value.

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Industry Focus


The same case happened in the US before. China’s plan to replace coal as the key component in its energy mix will need some time. The US needed more than 10 years to reduce coal-fired power plants’ share of the energy mix from above 50% to the existing level of around 30%, and the progress has only accelerated in the past five years. The tipping point for a lower coal mix in its power generation capacity arose from lower natural gas prices in the past three years – thus reinforcing the benefits of gas, i.e. better efficiency and lower carbon emission. US electricity generation by source

Source: EIA, DBSVI Moreover, coal is expected to become the dominant fuel in Southeast Asia (SEA), according to the Mineral Council of Australia, and will reach the US’ consumption size by 2040. The key driver for the SEA coal market is Indonesia, whose demand is expected to reach 250m tons – equivalent to the coal consumption size of EU 28 – by 2040, according to the EIA. Coal will remain in demand for countries that need a lot of energy to fuel their growth ambitions such as India, SEA nations and even China. Moreover, we do not foresee strict environmental regulations in SEA countries, as the key priorities now revolve around the meeting of electrification and capacity targets. Power plant capacity expansion execution is the key risk for coal demand in ASEAN, in our view. ASEAN countries such as Indonesia are challenged with land clearing, securing long- term financing and transmission of electricity. Only 24% of IPP projects are entering the construction phase in Indonesia, even as the government insists that these projects will commence operations in 2019.

35MW status (IPP only)

Source: PLN, DBSVI Indonesia: Rapid growth for power usage, but undersupply still persists Indonesia will drive coal consumption in ASEAN via its initiatives to raise electrification rates to support its infrastructure and investment expansion. Indonesia’s electricity consumption is still one of the lowest (alongside India) in the world and thus has abundant upside given the government’s 35,000MW project rollout. Indonesia’s per capita electricity consumption

Source: PLN, DBSVI Indonesia’s domestic coal consumption will breach the 100m ton barrier by 2018, in our estimation, if its 35MW power plant project is on track to meet the government’s target. Indonesia anticipates that coal will still become its main energy mix, despite the introduction of renewable energy as part of the government’s clean energy initiatives in the long term.

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Industry Focus


Indonesia’s domestic coal consumption

Source: BP Statistics , DBSVI Indonesia’s coal consumption has doubled in the past five years due to the rollout of coal-fired power plant capacity – as the government had prioritized coal as a primary energy mix in its Fast Track Program (FTP) I through Presidential Decree No 71/2006. Currently, coal accounts for 30% of Indonesia’s energy mix and we expect coal to remain one of Indonesia primary energy sources, besides oil and gas, given the relatively affordable price of coal. The Power Supply Business Plan (RUPTL) 2016-2025 also shows that the upcoming 35,000MW project will still be dominated by coal-fired power plants, which account for around 56% of the total planned power plant capacity expansion. 35,000MW program – RUPTL 2016-2025

Source: PWC, DBSVI The immense capacity addition means that PLN cannot work alone, given its balance sheet expansion limitation, even as it has obtained external funding from the government’s budget (APBN) and committed loans. PLN estimates there will be a funding gap of Rp392tr to complete the 35,000MW power plant project. Since its hard for PLN to execute the project alone, IPPs should play a significant role – as partners to PLN and the

government to achieve the targeted electrification ratio and power capacity to fuel economic growth. PLN and IPPs’ net capacity addition (MW)

Source: ADB , DBSVI Besides being the proxy for higher domestic coal consumption, Indonesian coal miners can also fit into the power plant thematic play given their intention to penetrate into the power sector as part of their long-term downstream diversification plans. Adaro, via its subsidiary Adaro Power, has a 34% participating interest in Bhimasena Power Indonesia – a 2x 1,000MW project which is slated to commence operations around 2020. ITMG last year established Banpu Power to tap into the power business, and is currently seeking partnerships and project tenders. ITMG intends to go into the power business is part of its long term diversification strategy beyond its core coal mining operation. Moreover, PTBA also set to unlock its multi decade coal reserves life, via initiating the mine mouth power plants project around its mining concession in southern Sumatera, besides addressing transportation capacity bottlenecks. India: Still into coal Coal-fired power plants still dominate power plant projects that are under construction, which means future demand and coal imports from India will also remain strong. Moreover, in the long term, we believe India's coal consumption uptrend will also provide another cushion against lower demand from China and developed markets. Despite India’s reliance on coal, India still imports more than half of its coal consumption. Addressing coal imports is one of the government key agendas, as India’s coal consumption is projected to grow by 2.8% per year – thus outpacing the US’s coal consumption by 2020, according to the EIA. India targets to double its coal production by 2020 to 1bn tons of coal to cope with the rising demand. Coal import growth will continue to be driven by the expanding coal-fired power plant capacity in the country.

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Industry Focus


Coal-fired power plants will continue to be India’s electricity generation backbone. The underdevelopment energy capacity is also dominated by coal-fired generation (see chart).Though there will be a spike in renewable energy initiatives, coal will continue to dominate India’s power generation capacity expansion as coal is the most economical energy source relative to others like gas and nuclear. Moreover, it is easier to gain meaningful economies of scale for coal-fired power plants whose power generation system and construction technique are more common in India. India's under construction power plant

Source: Australia Energy Update, DBSVI

Stock pick

Reiterate ITMG and ADRO as our top picks We reiterate ITMG and ADRO as our top picks for the Indonesian coal sector, given their capability to deliver strong performances amid the various coal price cycles. We also believe both coal miners have the least performance overhang issues, such as domestic coal pricing and railway transportation bottlenecks, which could affect PTBA’s ability to execute. We reiterate our overall earnings forecast, TP and rating for three coal stocks under our coverage. Adaro Energy (ADRO IJ), BUY, TP of Rp2,100. We like

ADRO for its proven execution track record in maintaining strong profitability in various coal price cycles. We witnessed ADRO’s profitability expansion last year, even in the face of a challenging coal price environment. ADRO intends to venture into coking coal and power plant businesses, which could act as re-rating catalysts in the long term.

Indo Tambangraya Megah (ITMG IJ), BUY, TP of Rp20,500. Besides the ability to sustain its cash margin (thanks to efficiency-enhancing programs), a higher coal price also

means that ITMG’s remaining coal resources can be feasibly converted into mineable reserves. We estimate that every US$10 per ton of coal price change could add around 40m tons to ITMG’s coal reserves or around two years of long-term reserves life. A higher reserves life, coupled with its disciplined mining operation, means that ITMG could deliver a strong and sustainable cash margin of US$10-11 per ton for its remaining reserves life, while paying steady dividends to its investors.

Tambang Batubara Bukit Asam (PTBA IJ), BUY, TP of

Rp16,000. We like PTBA for its strong approach when negotiating with mining contractors, which enables PTBA to achieve strong efficiency. Its coal production volume will also improve over time, in view of its railway capacity expansion. The ability to execute is the key thing to watch in 2017 given PTBA’s production volume expansion is tied to its railway capacity expansion. Moreover, PTBA’s profit performance also depends on how quickly it can convert its mining activities in-house (to bring them under its internal mining contractor), if it fails to negotiate down the fee further with third-party mining contractors.

Overall, our coal miners’ TPs implies an average FY17 PE of 10.0x-12.0x. We believe coal stocks’ valuation are still undemanding even at our conservative coal price assumption. We believe that Indonesian coal miners deserve to be re-rated upward in view of a stable long-term coal price outlook and resilient earnings growth outlook. This improving outlook bodes well for the miners’ financial performance in the form of 1) sustainable and strong profitability, arising from better ASP and mining activity optimisation programs, 2) steady dividends, with attractive yields of 2%-3% on average – ex. ITMG, the dividend yield of miners could reach 8% in the next seven years, in our estimation, and 3) strong balance sheets, which can ensure high financial flexibility and survivability in various coal price cycles. Though coal prices are still hovering at around US$72-75 per ton, we believe the market is aware of the possibility that coal prices will trade at US$65-US$75 per ton moving ahead. The market assumes that coal prices will not drop below US$65 per ton, given the Chinese government’s proactive control on domestic coal production. However, on the other hand, the Chinese government also will prevent coal prices from spiking above US$85 per ton, as this will hurt the domestic power plant generators’ profitability and electricity consumption. This is also reflected in the current valuation of coal stocks, which is still in an undemanding range. Despite coal prices hovering at around US$75 per ton, Indonesian coal stocks are trading at a 2017 PE range of 8.0x-9.5x , or lower than its

Industry Focus


historical level when coal prices hit a current similar level of US$72-US$75 per ton. We believe that the market thinks coal prices should correct sometime this year as the seasonally low production period of 1Q17 has ended, coupled with the lack of significant demand catalysts post winter restocking. PTBA’s five-year forward PE band

Source: Bloomberg Finance L.P, DBSVI ITMG’s five-year forward PE band

Source: Bloomberg Finance L.P, DBSVI ADRO’s five-year forward PE band


Share price corrected, opportunity emerged

Coal stocks underwent a correction last month after performing solidly in 1Q17. We believe this share price correction provides a good entry point for coal counters, given that PTBA, ADRO and ITMG are trading at single-digit PEs despite their solid earnings outlook this year. A steady coal price outlook also means that

coal miners can get to enjoy earnings stability, and optimise their mining operational activities and reserves life to deliver robust returns to their shareholders. Coal price performed well in 1Q17 on undemanding valuation and stronger-than-expected 4Q16 (thanks to higher-than-expected coal ASP). The coal miners’ positive performance continued in 1Q17, as seen in ADRO and PTBA’s financial results, given that coal prices in 1Q17 have also trounced consensus expectation. Besides the seasonally low production period of 1Q17 keeping coal prices above US$75 per ton, the onset of cyclone Darby that will potentially affect 10% of Australia’s production volume this year has led to a persistent share price rally for coal miners. Such a development has also buoyed coal prices to US$85 per ton. Coal miners' share price performance YTD

Source: Bloomberg Finance L.P , DBSVI Performance delivery to boost earnings and share price

Going forward, we believe there are still further earnings and share price upside for the Indonesian coal miners this year on the back of a brighter earnings performance outlook, thanks to solid top line growth performance and relatively stable operational cost this year. We believe 2017 financial performance will be a short-term catalyst for coal stocks. After seeing a strong financial performance in 1Q17, we expect coal miners’ financial performance to top consensus estimates in the remaining quarters of 2017 due to higher-than-expected ASP and normalising production trend. Indonesia coal miners locked more than half of its 2017 coal sales volume at favourable coal prices according to our check due to higher than expected coal benchmark price trend in 4Q16 and 1Q17. Moreover, the market has not priced in the profitability improvement of the largest coal miners on the back of structural changes in their mining operations to cope with the low coal price environment in the last two years. The largest coal miners

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Industry Focus


have established very efficient mining plans in the past five years, including stringent mining contractor fee renegotiation rules as well as reserves optimisation program which enabled the coal miners to lower their strip ratio and cash cost without significantly damaging their long-term coal reserves.

Solid profitability even amid the worst coal price cycle

We believe that coal price is not the key driver for coal stocks’ share price performance in the long term, as profitability is a critical factor for re-rating catalyst. Profitability is determined by a whole range of factors, including the combination of ASP trend and coal miners’ ability to maintain operational efficiency in various coal price cycles. We have discovered that profitability per ton coal mined is the most critical factor for coal stocks, and not just coal prices. ADRO’s share price and profitability performance

Source: Bloomberg Finance L.P , company, DBSVI ITMG’s share price and profitability performance

Source: Bloomberg Finance L.P , company, DBSVI

PTBA’s share price and profitability performance

Source: Bloomberg Finance L.P , company, DBSVI Key risk The key risk to our coal price assumption is faster-than-expected coal supply expansion in the ex. China region, which implies that the impact of China’s proactive supply control will not be as strong as in 2H16, given the upcoming volume numbers will lead to a dilution of China’s production volume contribution to global supply, and China’s influence over domestic and global coal prices. Coal supply-demand dynamics will undergo structural changes, in light of the lower coal-fired power plant project pipeline around the world, particularly China. Nonetheless, long-term coal demand will still come from ASEAN countries and India, which have sizeable new coal-fired power plant projects in the pipeline. In our view, a slower-than-expected coal-fired power plant rollout in ASEAN and India could pose a long-term threat to coal prices.

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Industry Focus


Company Guides


BUY Last Traded Price ( 29 May 2017): Rp1,465 (JCI : 5,712.30) Price Target 12-mth: Rp2,100 (43% upside) Potential Catalyst: Quarterly earnings performance Where we differ: We believe ADRO deserves a valuation re-rating on stronger earnings performance going forward


What’s New Maintain BUY and TP of Rp2,100

Our TP implies higher PE of 11.7x

Sticking to our earnings forecast in FY17/18

Stronger earnings growth ahead

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018F Revenue 2,685 2,524 2,945 3,104 EBITDA 550 813 1,105 1,174 Pre-tax Profit 280 547 823 881 Net Profit 153 335 430 459 Net Pft (Pre Ex.) 153 335 430 459 Net Pft Gth (Pre-ex) (%) (14.2) 119.1 28.3 7.0 EPS (Rp) 63.6 139 179 191 EPS Pre Ex. (Rp) 63.6 139 179 191 EPS Gth Pre Ex (%) (14) 119 28 7 Diluted EPS (Rp) 63.6 139 179 191 Net DPS (Rp) 31.4 30.5 89.4 95.6 BV Per Share (Rp) 1,184 1,318 1,408 1,503 PE (X) 23.1 10.5 8.2 7.7 PE Pre Ex. (X) 23.1 10.5 8.2 7.7 P/Cash Flow (X) 12.5 5.2 5.1 4.5 EV/EBITDA (X) 8.8 5.5 3.9 3.4 Net Div Yield (%) 2.1 2.1 6.1 6.5 P/Book Value (X) 1.2 1.1 1.0 1.0 Net Debt/Equity (X) 0.2 0.1 0.0 CASH ROAE (%) 5.4 11.1 13.1 13.1 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): N/A 173 173 Other Broker Recs: B: 21 S: 3 H: 1

Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P

Maintain BUY on stronger performance ahead

Maintain BUY and TP of Rp2,100. We reiterate our Buy rating and TP of Rp2,100 for ADRO (FY17F P/E of 11.7x). Stable long-term coal prices ensure the coal miners’ ability to monetise their remaining reserves life. We believe ADRO deserves to be re-rated in view of its ability to maintain its strong profitability and earnings performance in various coal price cycles. Retaining our FY17/18 forecast at this point. We believe that we have already baked in a conservative coal production volume assumption. Our FY17 assumptions include operational EBITDA forecast of Rp1.1tr and NPAT forecast of Rp430bn which are pretty much in line with management guidance and 1Q17 financial performance. Stronger performance outlook for the remaining quarters. We expect ADRO’s strong earnings performance to continue for the rest of the year in the absence of seasonality factors. We expect higher coal production and sales volume moving forward, in the direction of management’s FY17 target of around 53m tons. Valuation:

We are maintaining our BUY rating with DCF-based target price of Rp2,100 (WACC of 12.1% and terminal growth rate of 0%). This implies an FY17F PE of 11.7x, which is in line with ADRO’s five-year average P/E multiple. Key Risks to Our View:

2017 coal pricing. Our forecast is dependent on ADRO’s capability to secure favourable coal prices from buyers, which should be seen in the rest of the year. At A Glance Issued Capital (m shrs) 31,986 Mkt. Cap (Rpm/US$m) 46,859,434 / 3,529 Major Shareholders (%) Adaro Strategic Investment 43.9 Thohir Garibaldi 6.5 Soeryadjaya Edwin 4.3

Free Float (%) 45.3 3m Avg. Daily Val (US$m) 4.5 ICB Industry : Basic Materials / Mining

DBS Group Research . Equity 30 May 2017

Indonesia Company Guide

Adaro Energy Version 6 | Bloomberg: ADRO IJ | Reuters: ADRO.JK Refer to important disclosures at the end of this report


Company Guide

Adaro Energy

WHAT’S NEW

Maintain BUY on stronger performance ahead

Earnings forecast: Maintaining our earnings forecast

We believe that we have already baked in a conservative coal production volume assumption. Our FY17 assumptions include operational EBITDA forecast of Rp1.1tr and NPAT forecast of Rp430bn which are pretty much in line with management guidance and 1Q17 financial performance. Our ASP assumption of US$52 per ton is also in line with management’s latest YTD guidance for coal prices. We expect ADRO to book relatively steady coal ASP moving ahead in view of its positive mix of coal contract prices in the medium to long term. 1Q17 performance: A good start to the year

Earnings largely in line with our and consensus’ forecasts. ADRO’s earnings recovered y-o-y on higher ASP despite weaker coal production in 1Q17 due to the rainy season. Reported NPAT came in at US$97m (+63% y-o-y, -23% q-o-q), while core NPAT excluding non-operational items net of tax stood at US$132m. Its operating EBITDA of US$276m (+44% y-o-y, +3% q-o-q) met our forecast, as ADRO continued to emphasise profitability amid the rising coal ASP trend. Its strip ratio reached 4.6x in 1Q17, still below its FY17 target of 4.85x, as ADRO maintained a relatively low strip ratio to cope with the seasonal operational trend in 1Q17. Revenue met our forecast; higher ASP offset seasonal low production volume in 1Q17. Revenue reached US$727m (+24% y-o-y, -3% q-o-q) mainly on higher ASP. ASP came in at US$56 per ton in 1Q17, representing a 39% y-o-y jump. On the other hand, the rainy season hindered ADRO’s overall mining activity, as evidenced by lower y-o-y coal production of 11.9m tons (-6% y-o-y) and sales volume of 12m tons (-11% y-o-y).

What to look for : Stronger performance expected in the

rest of the year

Stronger performance outlook for the remaining quarters. We expect ADRO’s strong earnings performance to continue for the rest of the year in the absence of seasonality factors. Note that unlike Tambang Batubara Bukit Asam (PTBA) that uses the conveyor belt coal hauling method, ADRO uses trucking-based

coal hauling technique that could be hampered by the rainy season, which typically takes place in 1Q17. On track to meet our forecast and management guidance. We expect higher coal production and sales volume moving forward, in the direction of management’s FY17 guidance of around 53m tons. A y-o-y ASP recovery for coal will also be seen for the rest of this year (given the higher benchmark coal price trend in the last six months), which will have a positive impact on coal ASP for contracts this year. On the other hand, ADRO will also implement a higher strip mining strategy, in response to the better ASP outlook, resulting in a higher cash cost level vs. 1Q17. Net-net, the company is on track to meet our forecast and management’s guidance.

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Source: Company , DBSVI

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Source: Company , DBSVI

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Company Guide

Adaro Energy

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Flat production outlook. We assumed coal output growth would be relative flat over FY16-18F, premised on ADRO’s defensive strategy of profitability prioritisation over production expansion. Tutupan and Paringin concessions will remain the largest contributors (48m tons) at 96% of ADRO's coal production. Improved coal price outlook. Coal ASP will improve alongside the better Newcastle coal benchmark price outlook. We expect ASP to climb to US$52 per ton in FY17 before rising further to US$54 per ton in FY18, in line with our higher coal benchmark price forecast of US$65 per ton next year. A higher coal ASP will allow ADRO to expand its profitability and deliver better earnings growth. Lower cash cost on better operational efficiency. We have assumed slightly lower cash cost of U$33.6 per ton in FY17, while conservatively imputing similar mining contracting rates for this year. We have factored in lower fuel cost in our cash cost estimate. ADRO’s cost-saving measures would help to boost its earnings. Lower fuel cost will also help ADRO to lower cash cost per ton. ADRO’s fuel cost reached US$0.7/litre last year and at current coal prices, fuel cost is US$0.5 per litre, half of its 5-year average. Ongoing refinancing efforts to reduce cost of debt. ADRO will continue to reduce borrowing cost via refinancing. Its interest dropped by 16% in FY16 to US$41m. ADRO's access to competitive financing terms bodes well for the company; it has recently refinanced its existing debt with Adaro Indonesia (involving a US$1bn loan facility) at a lower borrowing cost.

Sales volume (m tons)

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Interest expenses (US$mn)



Company Guide

Adaro Energy

Balance Sheet:

Reliance on third-party financing. ADRO will continue to deleverage its balance sheet in the absence of plans to acquire new coal assets. However, its foray into power plants means that ADRO cannot fully be a debt-free coal miner because it would need to rely on third-party financing to supplement weak internal cashflow generation. Modest capex outlook, ample reserves. We forecast ADRO will spend US$200m per year on capex in 2017-2018 mainly to expand output at existing concessions, for its downstream power plant project, and maintenance of machineries. Our capex assumption is in line with management’s new guidance for FY17. ADRO has 1.1bn tons of coal reserves, sufficient to last 20 years at the current extraction rate. As such, ADRO can focus its capex on its power plant project. Share Price Drivers:

Better profitability leads to higher share price. ADRO’s share price tracks its profitability outlook. A better profitability outlook leads to a higher share price and vice versa. ADRO successfully boosted its profitability in 2016, getting close to the levels prior to the coal price downtrend in 2015. Key Risks:

Coal price. Coal price is the key upside/downside risk for coal miners, as they are price takers with minimal pricing power. Despite the impact of higher or lower coal prices not being fully reflected in ADRO’s quarterly earnings, the coal price sentiment can affect ADRO’s stock price. Execution risk. If ADRO fails to meet its targeted production volume and cash cost per ton, ADRO could miss our earnings estimate. Company Background

ADRO is Indonesia's second largest coal producer. It sells 75% of its production to the export market and the rest in the domestic market. It has subsidiaries that operate in the mining contracting, barging and ship-loading, and water-tolling businesses.

Leverage & Asset Turnover (x)

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Company Guide

Adaro Energy

Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F Sales volume (m tons) 56.2 51.4 52.6 53.5 54.0 ASP (US$/ton) 55.2 46.9 43.4 51.7 53.9 Cash cost/ ton (US$/ton) 40.7 39.2 35.8 33.6 34.0 EBITDA margin (%) 20.1 27.2 35.4 37.5 37.8 Interest expenses (US$mn) 190 48.9 40.9 33.7 38.9

Segmental Breakdown

FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (US$m) Coal Mining 3,102 2,492 2,347 2,765 2,909 Mining Contracting 139 123 111 145 160 Others 84.2 70.4 66.0 35.0 35.0 Total 3,325 2,685 2,524 2,945 3,104

Income Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 3,325 2,685 2,524 2,945 3,104 Cost of Goods Sold (2,605) (2,141) (1,839) (1,926) (2,014) Gross Profit 720 543 685 1,019 1,091 Other Opng (Exp)/Inc (226) (211) (97.7) (162) (171) Operating Profit 494 332 588 857 920 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (3.7) (3.0) (0.2) (0.2) (0.2) Net Interest (Exp)/Inc (165) (48.9) (40.9) (33.7) (38.9) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 325 280 547 823 881 Tax (142) (129) (206) (387) (414) Minority Interest (5.4) 1.40 (6.1) (6.7) (7.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 178 153 335 430 459 Net Profit before Except. 178 153 335 430 459 EBITDA 665 550 813 1,105 1,174 Growth Revenue Gth (%) 1.2 (19.3) (6.0) 16.7 5.4 EBITDA Gth (%) (4.1) (17.3) 47.8 35.9 6.3 Opg Profit Gth (%) (8.5) (32.7) 76.9 45.8 7.3 Net Profit Gth (Pre-ex) (%) (24.0) (14.2) 119.1 28.3 7.0 Margins & Ratio Gross Margins (%) 21.7 20.2 27.2 34.6 35.1 Opg Profit Margin (%) 14.8 12.4 23.3 29.1 29.6 Net Profit Margin (%) 5.4 5.7 13.3 14.6 14.8 ROAE (%) 6.5 5.4 11.1 13.1 13.1 ROA (%) 2.7 2.5 5.4 6.4 6.7 ROCE (%) 4.7 3.1 6.3 7.4 7.7 Div Payout Ratio (%) 50.0 49.4 21.9 50.0 50.0 Net Interest Cover (x) 3.0 6.8 14.4 25.4 23.7



Company Guide

Adaro Energy

Quarterly / Interim Income Statement (US$m)

FY Dec 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 572 586 589 603 746 Cost of Goods Sold (466) (432) (441) (440) (526) Gross Profit 107 154 149 163 220 Other Oper. (Exp)/Inc (94.3) (36.9) (29.3) (17.1) (14.3) Operating Profit 12.3 117 119 146 205 Other Non Opg (Exp)/Inc (14.8) (11.5) (10.4) (11.0) (8.2) Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (2.5) 106 109 135 197 Tax (26.4) (44.9) (46.7) (46.9) (67.4) Minority Interest 2.10 (1.1) 0.20 (1.3) (3.8) Net Profit (26.8) 59.7 62.4 86.6 126 Net profit bef Except. (26.8) 59.7 62.4 86.6 126 EBITDA 118 192 206 227 268 Growth Revenue Gth (%) (19.8) 2.5 0.5 2.2 23.8 EBITDA Gth (%) (28.0) 62.7 7.3 10.2 18.1 Opg Profit Gth (%) (87.4) 854.2 1.8 22.2 40.9 Net Profit Gth (Pre-ex) (%) (144.2) (323.0) 4.5 38.8 45.5 Margins Gross Margins (%) 18.6 26.3 25.2 27.0 29.5 Opg Profit Margins (%) 2.1 20.0 20.2 24.2 27.5 Net Profit Margins (%) (4.7) 10.2 10.6 14.4 16.9

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 3,715 3,494 3,981 3,933 3,878 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 1,427 1,372 949 951 954 Cash & ST Invts 745 680 1,098 1,199 1,501 Inventory 96.7 72.8 73.4 44.6 46.7 Debtors 286 196 301 404 380 Other Current Assets 144 122 142 244 252 Total Assets 6,414 5,937 6,543 6,776 7,011 ST Debt 193 123 154 56.3 56.3 Creditor 351 196 208 264 276 Other Current Liab 231 135 283 297 312 LT Debt 1,688 1,384 1,280 1,293 1,239 Other LT Liabilities 693 768 811 811 811 Shareholder’s Equity 2,766 2,844 3,167 3,382 3,612 Minority Interests 492 487 639 671 705 Total Cap. & Liab. 6,414 5,937 6,543 6,776 7,011 Non-Cash Wkg. Capital (55.4) 58.5 24.9 131 91.0 Net Cash/(Debt) (1,135) (826) (337) (150) 206 Debtors Turn (avg days) 32.7 32.7 35.9 43.6 46.1 Creditors Turn (avg days) 50.9 52.0 45.7 51.3 56.0 Inventory Turn (avg days) 15.0 16.1 16.5 12.8 9.5 Asset Turnover (x) 0.5 0.4 0.4 0.4 0.5 Current Ratio (x) 1.6 2.4 2.5 3.1 3.4 Quick Ratio (x) 1.3 1.9 2.2 2.6 2.9 Net Debt/Equity (X) 0.3 0.2 0.1 0.0 CASH Net Debt/Equity ex MI (X) 0.4 0.3 0.1 0.0 CASH Capex to Debt (%) 10.6 (3.1) 49.7 14.8 15.4 Z-Score (X) 1.8 1.9 2.0 NA NA



Company Guide

Adaro Energy

Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 325 280 547 823 881 Dep. & Amort. 176 221 226 248 255 Tax Paid (142) (129) (206) (387) (414) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 54.2 (88.0) (94.2) (17.9) 33.4 Other Operating CF 1,033 (3.1) 208 25.3 26.2 Net Operating CF 1,447 281 681 692 781 Capital Exp.(net) (200) 47.1 (712) (200) (200) Other Invts.(net) 6.40 68.2 281 (2.3) (2.5) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (692) 8.90 122 (103) (8.1) Net Investing CF (886) 124 (309) (305) (211) Div Paid (89.1) (75.5) (73.2) (215) (230) Chg in Gross Debt (269) (374) (72.2) (84.6) (54.6) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (138) (21.0) 192 14.2 14.9 Net Financing CF (497) (471) 46.2 (285) (269) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 64.5 (65.2) 418 102 301 Opg CFPS (Rp) 580 154 322 295 311 Free CFPS (Rp) 519 137 (13.2) 205 242


Target Price & Ratings History

Source: DBSVI

Analyst: William Simadiputra


BUY Last Traded Price ( 29 May 2017): Rp15,800 (JCI : 5,712.30) Price Target 12-mth: Rp20,500 (30% upside) Potential Catalyst: Quarterly earnings performance Where we differ: We believe ITMG’s dividend yield can offset concerns over its limited coal reserves life


What’s New Maintain BUY and TP of Rp20,500

Share price correction provides good entry point

Maintain our overall FY17/18 earnings forecast

Expect steady dividends moving forward

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018F Revenue 1,589 1,368 1,578 1,707 EBITDA 200 272 292 343 Pre-tax Profit 139 192 232 282 Net Profit 63.1 131 170 206 Net Pft (Pre Ex.) 63.1 131 170 206 Net Pft Gth (Pre-ex) (%) (68.5) 107.1 29.7 21.4 EPS (Rp) 744 1,540 1,998 2,426 EPS Pre Ex. (Rp) 744 1,540 1,998 2,426 EPS Gth Pre Ex (%) (68) 107 30 21 Diluted EPS (Rp) 744 1,540 1,998 2,426 Net DPS (Rp) 1,489 489 1,398 1,698 BV Per Share (Rp) 9,842 10,680 11,279 12,007 PE (X) 21.3 10.3 7.9 6.5 PE Pre Ex. (X) 21.3 10.3 7.9 6.5 P/Cash Flow (X) 7.0 6.0 5.0 5.3 EV/EBITDA (X) 5.4 3.7 3.1 2.4 Net Div Yield (%) 9.4 3.1 8.8 10.7 P/Book Value (X) 1.6 1.5 1.4 1.3 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 7.3 15.0 18.2 20.8 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): N/A 2,383 2,370 Other Broker Recs: B: 18 S: 1 H: 4

Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P

A good entry point

Maintain BUY rating with TP of Rp20,500. We believe the share price correction in the last two weeks provides a good entry point, as ITMG’s valuation looks undemanding at 7.7x FY17 PE. Our earnings forecast is conservative, as we have modelled ITMG’s earnings using a modest coal benchmark price assumption of US$65-70 per ton moving forward. High margins will sustain. We are more confident about ITMG’s long-term profitability given its ability to maintain a relatively healthy cash margin despite the higher strip ratio. This is largely due to its reserves optimisation program, and better profitability that implies stronger cash flow generation prospects and higher dividends whose sustainability should trounce our previous expectations. We raise our long-term coal production and cash margin assumption to 29.5m tons and US$11.5 per ton, respectively, for 2019 and beyond (from 26.0m tons and US$9 per ton previously) – due to a slower production decline rate in the next eight years and its efficiency-enhancing program. Reserves life a concern, but offset by attractive dividend yield. We stick to our reserves life assumption of eight years, but raise our long-term cash margin forecast to US$11.5 per ton, as we believe concerns over its low reserves can be offset by its undemanding valuation and attractive dividend yield. Valuation:

We maintain our BUY rating with a new DCF-based TP of Rp20,500 (WACC: 16.0% and TG: 0%), which implies 10.3x FY17F PE, lower than ADRO's 11.7x and PTBA’s 11.4x valuations. We believe its dividend yield can be sustained in the long term, thus allaying any concerns over its limited reserves. Key Risks to Our View:

Drop in coal price. A lower-than-expected ASP can lead to lower operational flexibility for ITMG. A dimmer ASP outlook can also hurt ITMG’s long-term coal reserves, which is negative for valuation and target price. At A Glance Issued Capital (m shrs) 1,130 Mkt. Cap (Rpm/US$m) 17,852,815 / 1,344 Major Shareholders (%) Banpu Minerals (%) 65.1 Sigma Buana Cemerlang 2.4

Free Float (%) 29.1 3m Avg. Daily Val (US$m) 3.0 ICB Industry : Basic Materials / Mining

DBS Group Research . Equity 30 May 2017


Indo Tambangraya Megah Version 6 | Bloomberg: ITMG IJ | Reuters: ITMG.JK Refer to important disclosures at the end of this report


Company Guide

Indo Tambangraya Megah

WHAT’S NEW

A good entry point

We reiterate our forecast in the meantime. Despite the stronger-than-expected performance, we maintain our overall operational and financial forecasts for 2017 and 2018. We believe ITMG will continue to deliver strong earnings performance for the remaining quarters in 2017 given the higher ASP trend and ITMG’s ability to maintain its low cost structure. Another upside potential could emerge if ITMG is able to ramp up its production capacity faster than the seasonally slow pace of 1Q. High margin will sustain We are more confident about ITMG’s long-term profitability given its ability to maintain a relatively healthy cash margin despite the higher strip ratio. This is largely due to its reserves optimisation program, and better profitability that implies stronger cash flow generation prospects and higher dividends whose sustainability should trounce our previous expectations. We raise our long-term coal production and cash margin assumption to 29.5m tons and US$11.5 per ton, respectively, for 2019 and beyond (from 26.0m tons and US$9 per ton previously) – due to a slower production decline rate in the next eight years and its efficiency-enhancing program. Undemanding valuation, double-digit dividend yield. We believe the share price correction in the last two weeks provides a good entry point, as ITMG’s valuation looks undemanding at 7.7x FY17 PE. Our earnings forecast is conservative, as we have modelled ITMG’s earnings using a modest coal benchmark price assumption of US$65-70 per ton moving forwards, coupled with the fact that 1QFY17 earnings already accounted for 33% of our full-year forecast. Besides the share price upside potential, the stock also offers a dividend yield of 9.1% in 2017 at the current share price.

ASP vs. Newcastle benchmark price (US$ per ton)


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Coal production volume (mn ton)


Company Guide



Earnings Drivers:

Earnings to grow by 29% in FY17, on higher coal ASP. We forecast earnings will grow by 29% y-o-y to US$170m in FY17 before growing further by 21% y-o-y to US$206m in FY18. The higher revenue and earnings in FY17 would be mainly driven by the better coal ASP outlook, coupled with a higher cash margin per ton, despite ITMG's flat production and sales volume growth. Flat production growth. In line with guidance and the group’s focus on profitability rather than production, we assume flat coal production and sales volume of 26m tons in FY17, before growing by 8% y-o-y to 28m tons in FY18. As ITMG’s mines have a remaining life of eight years, ITMG prefers to maintain a flat production volume to ensure stable profitability. We assume ITMG's strip ratio will increase to 10.0x in 2017 vs. 8.6x in 2016 given the brighter coal ASP outlook – hence, ITMG should be able to mine coal in the more pricey concessions (in terms of operational cost). ASP recovery underway. We expect persistent oversupply ahead, and we forecast the benchmark coal price will remain at US$65 per ton beyond 2017. This will affect ITMG’s coal pricing ahead. We assume ASP of US$62 per ton in 2017 and 2018. Our ASP assumption implies a 5% discount to our forecast benchmark price. Higher cash cost on higher strip ratio. Cash cost will increase to US$36.4 per ton in FY17 due to a better strip ratio outlook and higher fuel cost. We also assume fuel cost would increase to US$0.7 per litre (+49% y-o-y) in FY17, on the back of a higher crude oil price outlook vs. 2016. However, we see limited room for mining contracting fees to be renegotiated lower given ITMG’s flat volume growth. Miners with higher strip ratios will benefit from lower fuel prices. Miners, including ITMG, will be the largest beneficiary of lower fuel cost given their high usage of machineries, in our view. A low crude price environment has a positive impact on ITMG’s profitability, as seen last year.

Sales volume (m tons)

Avg selling price (US$/ton)

Cash cost (US$/ton)

Fuel cost (US$/liter)

EBITDA margin (%)



Company Guide


Balance Sheet:

Net cash position. ITMG’s has a net cash balance sheet as a strategy to cope with the challenging coal price environment. Its net cash position also means that ITMG will be able to pursue acquisition of reserves when opportunities present. Share Price Drivers:

Stock valuation had de-rated on bleak industry outlook in the past three years. ITMG’s share price has de-rated because of concerns over its depleting reserves, which could be dispelled by potential sizeable acquisitions moving ahead. Its limited reserves could also hurt earnings if it needs to cut output further, thus restricting its ability to lower its strip ratio. Key Risks:

Drop in coal prices. Coal miners are price-takers, with little pricing power. Furthermore, the pricing outlook is more challenging now, given the abundant supply and slower coal demand growth due to environmental concerns. Regulatory changes such as an export ban and increase in royalty fees. The coal industry is strictly regulated. Potential changes in policies such as an export ban, higher royalty fees, and production limits could have an adverse impact on coal miners’ earnings. Operational risk. If ITMG fails to secure meaningful coal reserves in the future, it may have to halt operations. Moreover, its efficiency-focused strategy may not lead to meaningful reductions in cash cost. Profitability risk. We have assumed that ITMG would maintain its cash margin by lowering its production. It is possible that ITMG may need to further cut its coal production volume if the remaining profitable concessions do not meet management expectations. Company Background

ITMG is one of the largest coal mining companies owned by Banpu. The scope of the business includes coal mining operation, processing and logistics. ITMG owns majority stakes in seven subsidiaries and operates six mining concessions in Kalimantan Island.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F Sales volume (m tons) 29.1 25.0 25.7 26.0 28.0 Avg selling price (US$/ton) 65.6 63.6 56.6 62.0 62.0 Cash cost (US$/ton) 43.6 38.2 35.6 36.4 36.2 Fuel cost (US$/liter) 1.00 0.70 0.50 0.70 0.70 EBITDA margin (%) 16.0 12.6 19.9 18.5 20.1

Income Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 1,943 1,589 1,368 1,578 1,707 Cost of Goods Sold (1,535) (1,239) (1,037) (1,223) (1,309) Gross Profit 408 350 331 354 397 Other Opng (Exp)/Inc (172) (157) (122) (126) (120) Operating Profit 236 194 209 228 278 Other Non Opg (Exp)/Inc 20.7 (57.4) (18.0) 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 5.40 3.30 1.50 4.40 4.40 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 262 139 192 232 282 Tax (61.8) (76.3) (61.3) (62.7) (76.2) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 200 63.1 131 170 206 Net Profit before Except. 200 63.1 131 170 206 EBITDA 310 200 272 292 343 Growth Revenue Gth (%) (10.8) (18.2) (14.0) 15.4 8.2 EBITDA Gth (%) (0.9) (35.5) 35.7 7.5 17.5 Opg Profit Gth (%) (30.1) (18.0) 7.7 9.3 21.9 Net Profit Gth (Pre-ex) (%) (13.1) (68.5) 107.1 29.7 21.4 Margins & Ratio Gross Margins (%) 21.0 22.0 24.2 22.4 23.3 Opg Profit Margin (%) 12.1 12.2 15.3 14.4 16.3 Net Profit Margin (%) 10.3 4.0 9.6 10.7 12.1 ROAE (%) 22.3 7.3 15.0 18.2 20.8 ROA (%) 15.2 5.1 10.9 13.3 15.0 ROCE (%) 19.0 9.5 15.2 16.7 19.2 Div Payout Ratio (%) 39.1 63.1 65.7 90.8 85.0 Net Interest Cover (x) NM NM NM NM NM



Company Guide


Quarterly / Interim Income Statement (US$m)

FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 331 278 349 409 368 Cost of Goods Sold (261) (232) (272) (272) (253) Gross Profit 69.7 46.7 77.3 137 115 Other Oper. (Exp)/Inc (31.2) (26.7) (30.7) (33.5) (25.8) Operating Profit 38.5 20.1 46.5 104 89.2 Other Non Opg (Exp)/Inc (5.2) (0.3) (1.3) (11.1) (1.5) Net Interest (Exp)/Inc 0.30 0.30 0.30 0.60 0.70 Pre-tax Profit 33.5 20.1 45.5 93.0 88.3 Tax (10.5) (6.6) (12.4) (31.8) (31.2) Net Profit 23.0 13.5 33.1 61.1 57.2 Net profit bef Except. 23.0 13.5 33.1 61.1 57.2 EBITDA 39.0 32.0 59.0 104 89.2 Growth Revenue Gth (%) (13.5) (15.9) 25.4 17.2 (10.1) EBITDA Gth (%) (38.7) (17.9) 84.4 75.5 (13.9) Opg Profit Gth (%) (18.5) (47.8) 132.0 122.5 (13.9) Net Profit Gth (Pre-ex) (%) (216.1) (41.6) 146.1 84.6 (6.5) Margins Gross Margins (%) 21.0 16.8 22.1 33.5 31.2 Opg Profit Margins (%) 11.6 7.2 13.3 25.3 24.2 Net Profit Margins (%) 7.0 4.8 9.5 14.9 15.5

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 286 255 224 192 167 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 452 412 447 469 493 Cash & ST Invts 226 269 327 444 512 Inventory 150 117 62.0 60.9 65.2 Debtors 170 119 125 143 155 Other Current Assets 23.2 8.40 23.7 24.9 26.1 Total Assets 1,307 1,179 1,209 1,334 1,418 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 166 121 94.0 158 169 Other Current Liab 199 164 145 152 160 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 44.6 59.5 63.5 66.7 70.0 Shareholder’s Equity 899 835 906 957 1,019 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,307 1,179 1,209 1,334 1,418 Non-Cash Wkg. Capital (20.7) (39.8) (27.9) (80.9) (82.3) Net Cash/(Debt) 226 269 327 444 512 Debtors Turn (avg days) 31.9 33.2 32.6 31.1 31.9 Creditors Turn (avg days) 40.8 44.5 40.2 39.6 47.9 Inventory Turn (avg days) 33.1 41.5 33.6 19.4 18.5 Asset Turnover (x) 1.5 1.3 1.1 1.2 1.2 Current Ratio (x) 1.6 1.8 2.3 2.2 2.3 Quick Ratio (x) 1.1 1.4 1.9 1.9 2.0 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 5.3 5.3 5.8 NA NA



Company Guide


Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 262 139 192 232 282 Dep. & Amort. 53.6 64.0 63.0 64.1 65.4 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (25.5) 53.9 6.90 45.7 (6.2) Other Operating CF (57.9) (66.2) (36.8) (71.9) (85.8) Net Operating CF 232 191 225 270 256 Capital Exp.(net) (106) (32.9) (32.2) (32.2) (40.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (79.1) 30.5 (60.1) (13.1) (13.8) Net Investing CF (185) (2.4) (92.3) (45.3) (53.8) Div Paid (90.1) (126) (41.5) (119) (144) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (19.6) (19.9) (33.0) 10.4 10.9 Net Financing CF (110) (146) (74.5) (108) (133) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (62.6) 42.5 58.4 117 68.5 Opg CFPS (Rp) 3,038 1,618 2,571 2,644 3,082 Free CFPS (Rp) 1,486 1,865 2,274 2,803 2,539



Source: DBSVI



BUY Last Traded Price ( 27 Apr 2017): Rp12,850 (JCI : 5,707.00) Price Target 12-mth: Rp16,000 (25% upside) (Prev Rp13,600) Potential Catalyst: Quarterly earnings performance Where we differ: We believe PTBA’s low mining contracting fee will sustain, thus boosting its earnings performance

Analyst

William Simadiputra +62 2130034939 [email protected]

What’s New Raise our earnings forecast for higher margins

Low mining contracting fees trend will sustain

Expect higher production volume going forward

Higher TP of Rp16,000 and maintain BUY rating

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016A 2017F 2018F Revenue 13,734 14,059 16,875 18,742 EBITDA 2,699 2,948 4,298 4,694 Pre-tax Profit 2,664 2,734 4,315 4,791 Net Profit 2,036 2,006 3,235 3,592 Net Pft (Pre Ex.) 2,036 2,006 3,235 3,592 Net Pft Gth (Pre-ex) (%) 1.0 (1.5) 61.2 11.0 EPS (Rp) 884 871 1,404 1,559 EPS Pre Ex. (Rp) 884 871 1,404 1,559 EPS Gth Pre Ex (%) 1 (1) 61 11 Diluted EPS (Rp) 884 871 1,404 1,559 Net DPS (Rp) 398 361 632 701 BV Per Share (Rp) 3,982 4,523 5,295 6,152 PE (X) 14.5 14.8 9.2 8.2 PE Pre Ex. (X) 14.5 14.8 9.2 8.2 P/Cash Flow (X) 10.9 20.3 7.3 8.3 EV/EBITDA (X) 10.1 9.7 6.4 5.7 Net Div Yield (%) 3.1 2.8 4.9 5.5 P/Book Value (X) 3.2 2.8 2.4 2.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 23.0 20.5 28.6 27.2 Earnings Rev (%): 0 18 10 Consensus EPS (Rp): N/A 1,263 1,305 Other Broker Recs: B: 22 S: 2 H: 2

Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P.

Internal efficiencies boost TP Lower mining contracting fees to boost earnings. We believe the low mining contracting expense trend will sustain, thanks to PTBA’s initiatives to be strict in negotiations with third-party mining contractors, coupled with its plan to expand its in-house mining contractor’s operations. PTBA aims to achieve a 50:50 ratio for its in-house and third-party mining contractors by around 2025. Raise TP for new forecast. We raise our DCF-based target price to Rp16,000 for higher earnings forecast – mainly due to lower mining contractor expenses, which boost our earnings forecast for FY17 by 18% to Rp3.2tr and FY18 by 10% to Rp3.6tr. PTBA has successfully maintained a low cash cost structure as seen in the last three quarters, mainly on the back of its better economies of scale vs. smaller miners and stable mining contracting fees. Our lower cash cost assumption lifts PTBA’s overall operating profitability and we believe our forecast is still conservative as it is still within the 5-year average profitability level. NPAT in 1Q17 beat our and consensus estimates. Top-line performance was in line with expectations on higher ASP and sales volume y-o-y. However, PTBA’s lower-than-expected overall mining costs (mainly mining contracting fees) allowed it to deliver a decent earnings performance in 1Q17. Valuation:

We maintain our BUY rating with a higher target price of Rp16,000. Our DCF-based target price (WACC: 11.6%, LT growth: 0%) implies 11.4x FY17F PE. Key Risks to Our View:

Production volume expansion. If PTBA is able to boost its coal production volume in line with management guidance, its top-line and earnings may beat our forecasts. Higher-than-expected cost. If PTBA fails to maintain its low cash cost trend, such as failing to clinch a favourable mining contracting rate from third-party contractors, its earnings could miss our expectation.

At A Glance Issued Capital (m shrs) 2,304 Mkt. Cap (Rpbn/US$m) 29,608 / 2,226 Major Shareholders (%) Republic of Indonesia (%) 65

Free Float (%) 35 3m Avg. Daily Val (US$m) 2.9 ICB Industry : Basic Materials / Mining

DBS Group Research. Equity 27 Apr 2017


Tambang Batubara Bukit Asam Version 5 | Bloomberg: PTBA IJ | Reuters: PTBA.JK Refer to important disclosures at the end of this report


Company Guide

Tambang Batubara Bukit Asam

WHAT’S NEW

Internal efficiencies boost TP

Lower mining contracting fees to boost earnings

We believe the low mining contracting expense trend will sustain, thanks to PTBA’s initiatives to be strict in negotiations with third-party mining contractors, coupled with its plan to expand its in-house mining contractor’s operations. PTBA aims to achieve a 50:50 ratio for its in-house (PT Satria Bahana Sejahtera (SBS) and third-party mining contractors by around 2025. Such efforts are positive for PTBA’s earnings performance this year amid concerns of limited coal ASP upside this year given its exposure to domestic coal markets. PTBA’s cost management efforts also attest to management’s commitment to deliver stronger profitability, which is a critical factor for coal miners’ stock price performance. New forecast leads to higher target price of Rp16,000 We raise our DCF-based target price to Rp16,000 (FY17F P/E of 11.4x) for higher earnings forecast – mainly due to lower mining contractor expenses, which boost our earnings forecast for FY17 by 18% to Rp3.2tr and FY18 by 10% to Rp3.6tr. Our new earnings forecast is above consensus and we believe consensus has yet to price in the low mining contracting fees going forward. We left our top-line related numbers such as coal ASP, production and sales volume unchanged, as we believe our forecast is still intact – as seen in its 1Q17 financial results. Moreover, we believe PTBA’s ASP should remain solid (as seen in 3Q17) as PTBA will stick to its existing coal pricing scheme with PLN for domestic coal sales (50% of revenue) for the rest of this year. Beyond benefiting from a higher ASP trend, PTBA has successfully maintained a low cash cost structure as seen in the last three quarters, mainly on the back of its better economies of scale vs. smaller miners and its strong bargaining power to clinch favourable mining contracting fees. Our lower cash cost assumption lifts PTBA’s overall operating profitability and we believe our forecast is still conservative as it is still within the 5-year average profitability level. Earnings double y-o-y in 1Q17, beating our and consensus forecasts NPAT came in at Rp871bn (+162% y-o-y, -12.2% q-o-q), ahead of our and consensus forecasts on better-than-expected profitability even though its top-line performance was in line with our and consensus forecasts – thanks to higher ASP and sales volume y-o-y. However, PTBA’s lower-than-expected overall mining costs (mainly mining contracting fees) allowed it to deliver a decent earnings performance (that trumped our and consensus expectations) in 1Q17.

Revenue reached Rp4.5tr (+28.3% y-o-y, +13.2% q-o-q), in line with our and consensus forecasts. The strong revenue momentum was driven by higher coal production and sales volume, coupled with the higher ASP on a y-o-y basis. A lower- than-expected overall cash cost per ton, with total cash cost reaching Rp557k per ton (flat y-o-y) in 1Q17 (which is driven by lower mining contracting fees and a low strip ratio of 4.0x) enabled PTBA’s 1Q17 profit to come in ahead of our and consensus forecasts.


Company Guide


PTBA share price vs. NPATM

Source: Companies, DBSVI Revenue, Op. Profit and NPAT trend

Source: Companies, DBSVI

Profitability trend

Source: Companies, DBSVI

Profitability trend

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Source: Companies, DBSVI Quarterly production volume trend

Source: Companies, DBSVI *2011-2014 is average quarterly production volume

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ASP (Rp/ton) Cash cost ex. Royalty (Rp/ton)

4.2 4.04.4 4.6

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Production volume (mn tons)


Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 1Q2016 4Q2016 1Q2017 % chg yoy % chg qoq

Revenue 3,545 4,017 4,547 28.3 13.2

Cost of Goods Sold (2,731) (2,061) (2,855) 4.5 38.5

Gross Profit 814 1,956 1,692 107.9 (13.5)

Other Oper. (Exp)/Inc (162) (203) (257) 58.2 26.6

Operating Profit 461 1,197 1,223 165.2 2.2

Net Interest (Exp)/Inc (47.7) (36.7) (56.1) (17.6) (52.8)

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit 480 1,289 1,218 153.7 (5.5)

Tax (147) (283) (335) 127.0 18.1

Minority Interest (0.3) (14.7) (13.0) (4,408.3) (11.9)

Net Profit 333 991 871 161.8 (12.2)

Net profit bef Except. 333 991 871 161.8 (12.2)

Margins (%)

Gross Margins 23.0 48.7 37.2

Opg Profit Margins 13.0 29.8 26.9

Net Profit Margins 9.4 24.7 19.2

Source of all data: Company, DBSVI

Earnings revision summary (PTBA)

2016A 2017F 2018F

Old New Changes Old New Changes Old New Changes

Revenue (Rpbn) 14,059 14,059 0% 16,875 16,875 0% 18,742 18,742 0%

Gross profit (Rpbn) 4,401 4,401 0% 4,834 5,498 14% 5,589 6,040 8%

EBITDA (Rpbn) 2,797 2,797 0% 3,634 4,298 18% 4,242 4,694 11%

Net profit (Rpbn) 2,006 2,006 0% 2,736 3,235 18% 3,253 3,592 10%

Production volume (m ton) 19.8 19.8 0% 22.2 22.2 0% 25 24.8 0%

ASP (Rp per ton) 707.2 707.2 0% 761.2 761.2 0% 755 754.8 0%

Cash cost per ton (Rpbn) 607 607 0% 540 510 -6% 545 525 -4% Source : Company, DBSVI


Company Guide



Earnings Drivers:

NPAT growth will turn positive on better ASP outlook. PTBA’s earnings will grow at 54% CAGR over FY16-FY18, on earnings recovery on the back of higher coal ASP outlook from both domestic and export markets, while PTBA will maintain its strict efficiency policies and production volume expansion of 12% y-o-y in FY17 and FY18. A higher ASP will allow PTBA to normalise its profitability in FY17 after hitting an all-time low in FY16. Better export market coal pricing on better coal benchmark price outlook. PTBA’s blended ASP will rise to Rp762k per ton in FY17 on higher coal price benchmark prices. Amid the better coal price benchmark environment, PTBA’s export prices can outpace domestic prices, which tend to be fixed in the prior year. Production CAGR of 12% over FY16-18F on railway capacity expansion. We assume that PTBA’s coal production and sales volume will grow by 12% CAGR (FY16-18F) to 24.8m tonnes in FY18 on railway capacity expansion. Our projected production and sales volume is lower than management’s guidance, as our assumption for railway capacity expansion is less bullish, at an 11% CAGR (FY16-18F) to 30m tonnes. PTBA’s sales volume growth is backed by long-term committed volumes of 574m tons with major buyers, mainly PLN (45% of long-term sales). Stable cash cost outlook given PTBA’s strict cost control and large operational scale. PTBA’s total cash cost (including royalty fees) is estimated to decrease by 8% y-o-y, thanks to lower mining contracting fees and stable overall other operating cash cost given that the strip ratio will remain stable at 4.5x.

Sales Volume-mn tons

Avg selling price(Ro000/ton)

Cash cost/ton (Rp000/ton)

Capex (Rpbn)

Railway capacity (mn ton)



Company Guide


Balance Sheet:

Low gearing balance sheet. PTBA has low gearing balance sheet on the back of the low capex spending outlook going ahead. This will give its financial flexibility such as the ability to accelerate power plant projects or pay special dividends amid the low coal price environment. Most of PTBA additional loans are allocated to its subsidiaries such as for its mining contracting subsidiary’s equipment and fleet expansion. Share Price Drivers:

Share price move in tandem with coal prices. PTBA's share price is correlated to its profitability outlook, which is determined by two critical factors – coal ASP and its cash cost outlook. A higher coal price trend is historically followed by higher share price for coal miners on the back of better earnings growth and an improved profitability outlook. Key Risks:

Slower-than-expected production expansion. A slower-than- expected railway capacity expansion can lead to disappointing production and sales volume. PTBA relies a lot on the execution and scale of PT KAI’s railway capacity expansion plan. The slower railway capacity expansion will translate into lower sales volume and revenue growth trend vs. our forecast. Higher-than-expected cash cost. PTBA’s margin will face contraction if it fails to maintain its low cash cost trend, such as failing to renegotiate favourable railway transportation and mining contracting fees with third-party mining contractors, or if PTBA’s new equipment fleet fails to achieve meaningful operating efficiencies. A higher-than-expected cash cost means that PTBA’s margin and earnings growth could be lower than our forecast. Company Background

PTBA is one of Indonesia's largest coal miners with 1.99bn tons of coal reserves. Its main coal mining concession is located in Tanjung Enim, South Sumatra. It is a state-owned company with the government being its major shareholder.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)



Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F Sales Volume-mn tons 16.4 19.3 19.8 22.2 24.8 Avg selling 724 769 707 761 767 Cash cost/ton (Rp000/ton) 631 632 607 510 525 Total Capex (Rpbn) 328 1,742 931 1,484 1,120 Railway capacity (mn ton) 14.8 22.0 24.0 27.0 30.0

Income Statement (Rpbn)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 13,078 13,734 14,059 16,875 18,742 Cost of Goods Sold (9,056) (9,594) (9,657) (11,377) (12,701) Gross Profit 4,022 4,140 4,402 5,498 6,041 Other Opng (Exp)/Inc (1,712) (1,725) (1,871) (1,519) (1,687) Operating Profit 2,310 2,414 2,531 3,980 4,354 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 146 134 150 169 188 Net Interest (Exp)/Inc 219 116 52.9 166 250 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,675 2,664 2,734 4,315 4,791 Tax (656) (627) (709) (1,079) (1,198) Minority Interest (3.0) (1.2) (18.2) (1.5) (1.6) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,016 2,036 2,006 3,235 3,592 Net Profit before Except. 2,016 2,036 2,006 3,235 3,592 EBITDA 2,584 2,699 2,948 4,298 4,694 Growth Revenue Gth (%) 16.7 5.0 2.4 20.0 11.1 EBITDA Gth (%) 11.3 4.4 9.2 45.8 9.2 Opg Profit Gth (%) 7.3 4.5 4.8 57.2 9.4 Net Profit Gth (Pre-ex) (%) 10.4 1.0 (1.5) 61.2 11.0 Margins & Ratio Gross Margins (%) 30.8 30.1 31.3 32.6 32.2 Opg Profit Margin (%) 17.7 17.6 18.0 23.6 23.2 Net Profit Margin (%) 15.4 14.8 14.3 19.2 19.2 ROAE (%) 25.2 23.0 20.5 28.6 27.2 ROA (%) 15.2 12.8 11.3 16.2 15.9 ROCE (%) 16.5 15.6 14.4 19.5 18.3 Div Payout Ratio (%) 45.0 45.0 41.5 45.0 45.0 Net Interest Cover (x) NM NM NM NM NM



Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 1Q2016 2Q2016 3Q2016 4Q2016 1Q2017 Revenue 3,545 3,214 3,283 4,017 4,547 Cost of Goods Sold (2,731) (2,378) (2,488) (2,061) (2,855) Gross Profit 814 836 795 1,956 1,692 Other Oper. (Exp)/Inc (162) (187) (145) (203) (257) Operating Profit 461 457 417 1,197 1,223 Net Interest (Exp)/Inc (47.7) (30.9) (33.5) (36.7) (56.1) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 480 512 452 1,289 1,218 Tax (147) (131) (111) (283) (335) Minority Interest (0.3) (2.4) (0.8) (14.7) (13.0) Net Profit 333 379 340 991 871 Net profit bef Except. 333 379 340 991 871 EBITDA 0.0 0.0 0.0 0.0 0.0 Growth Revenue Gth (%) 9.7 (9.3) 2.2 22.3 13.2 EBITDA Gth (%) nm nm nm nm nm Opg Profit Gth (%) (25.2) (1.0) (8.7) 187.1 2.2 Net Profit Gth (Pre-ex) (%) (37.3) 14.0 (10.3) 191.6 (12.2) Margins Gross Margins (%) 23.0 26.0 24.2 48.7 37.2 Opg Profit Margins (%) 13.0 14.2 12.7 29.8 26.9 Net Profit Margins (%) 9.4 11.8 10.4 24.7 19.2

Balance Sheet (Rpbn) FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 3,988 5,579 6,088 6,097 6,085 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,408 3,717 4,139 5,189 6,066 Cash & ST Invts 4,039 3,115 3,675 5,551 6,940 Inventory 1,033 1,233 1,102 1,298 1,449 Debtors 1,439 1,596 2,285 1,857 2,063 Other Current Assets 905 1,654 1,288 1,288 1,288 Total Assets 14,812 16,894 18,577 21,280 23,890 ST Debt 467 0.0 490 0.0 0.0 Creditor 546 1,146 539 685 765 Other Current Liab 2,561 3,777 4,013 4,013 4,013 LT Debt 962 623 2,141 3,409 3,964 Other LT Liabilities 1,605 2,061 841 841 841 Shareholder’s Equity 8,554 9,175 10,421 12,200 14,176 Minority Interests 117 113 131 131 131 Total Cap. & Liab. 14,812 16,894 18,577 21,280 23,890 Non-Cash Wkg. Capital 271 (440) 122 (255) 21.5 Net Cash/(Debt) 2,610 2,492 1,044 2,141 2,976 Debtors Turn (avg days) 40.0 40.3 50.4 44.8 38.2 Creditors Turn (avg days) 20.8 32.7 32.8 19.9 21.1 Inventory Turn (avg days) 39.6 43.8 45.4 39.0 40.0 Asset Turnover (x) 1.0 0.9 0.8 0.8 0.8 Current Ratio (x) 2.1 1.5 1.7 2.1 2.5 Quick Ratio (x) 1.5 1.0 1.2 1.6 1.9 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 22.9 279.5 29.5 9.6 8.3 Z-Score (X) 5.2 4.5 3.9 4.0 4.0



Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 2,675 2,664 2,734 4,315 4,791 Dep. & Amort. 129 150 267 318 340 Tax Paid (656) (627) (709) (1,079) (1,198) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (69.6) 245 (1,165) 378 (277) Other Operating CF (31.8) 285 336 105 (85.9) Net Operating CF 2,046 2,717 1,462 4,037 3,571 Capital Exp.(net) (328) (1,742) (776) (328) (328) Other Invts.(net) (1,307) (134) (155) (1,156) (792) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (255) 90.0 (1,147) 0.0 0.0 Net Investing CF (1,889) (1,786) (2,078) (1,484) (1,120) Div Paid (907) (1,050) (832) (1,456) (1,616) Chg in Gross Debt 1,429 (806) 2,008 779 555 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 17.0 0.0 0.0 0.0 0.0 Net Financing CF 539 (1,855) 1,175 (677) (1,062) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 696 (924) 559 1,876 1,389 Opg CFPS (Rp) 918 1,073 1,140 1,588 1,670 Free CFPS (Rp) 746 423 298 1,610 1,408



Source: DBSVI


Industry Focus


DBS Vickers recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

* Share price appreciation + dividends

Completed Date: 30 May 2017 13:20:59 (WIB) Dissemination Date: 30 May 2017 14:18:10 (WIB)

Sources for all charts and tables are DBSVI unless otherwise specified.

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assessments stated therein.

Industry Focus

ASIAN INSIGHTS VICKERS SECURITIES

Page 13

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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Industry Focus


Page 37

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Industry Focus


Page 38

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Documents

Coal sector 30-05-17 - DBS Bank reserves. Indonesia coal reserves stood at only 7.3bn-8.3bn tons in 2015, which are only 30%-40% of the 2014 level of 32bn tons. Moreover, the 1Q17