27 September 2012 Asia Pacific/Indonesia Equity Research Industrial Machinery (Metals & Mining/Industrial Machinery) / OVERWEIGHT
Indonesia Mining Contracting Sector Research Analysts Ami Tantri 62 21 2553 7976
[email protected] Dian Haryokusumo 62 21 255 37974
[email protected]
INITIATION
Time to re-visit Figure 1: Indonesia coal production: low cost and still growing 550
4,500
450
3,500
120 100
33
Newcastle coal price ($90/t)
80
350 2,500 250 1,500
150
50
500
60 40
7
32 85
65
50
20
2009 2010 2011 2012E 2013E 2014E Production volume (mn tonnes) Estimated overburden (mn bcm) - RHS
0 Indonesia
Columbia FOB Cost
US (CAPP/NAPP) Freight
Source: Company data, MEMR, Bloomberg, Credit Suisse estimates
■ Back to fundamentals: The price performance of the Indonesian mining contracting stocks in the past five months reflects the market view that the mining contracting performance has a strong correlation with coal price movement and has priced in the downside risks. However, our analysis shows that the long-term correlation is very low (0.1). We believe that the mining contracting business benefits from Indonesia’s growing coal mining activities, underlining its status as a major seaborne coal supplier with the Indonesian coal companies being among the lowest-cost producers in the region. ■ Still growing: With thermal coal demand rising and being among the lowest-cost producers in the region, we expect Indonesia’s coal output to continue rising. Hence, we anticipate the overburden removal to grow with higher coal output and strip ratio as miners move to more difficult areas to mine coal. This provides long-term growth opportunity for the mining contracting companies. ■ Stock calls: Our prefered stock is United Tractors as we believe the current share price has reflected the downside risks in the heavy equipment sector and weak mining contracting revenues. The second choice is Indika Energy, which we initiate with an OUTPERFORM rating, as its share price has fallen sharply and that its main earnings contribution is from the coal mining. We initiate ABM Investama and Delta Dunia with NEUTRAL ratings.
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27 September 2012
Focus charts and table Figure 2: To benefit from growing Indonesia coal
Figure 3: Low correlation with coal price
production and overburden volume 550
4,500
R= - 0.24
350%
R= - 0.54 R = 0.39
300%
450
3,500
350 2,500 250 1,500
150
250%
160
200%
140
150%
120
100%
100
50%
80
0%
60
500 2009
2010
2011
2012E
2013E
180
Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08
50
$/ton R= 0.92 200
2014E
Production volume (mn tonnes)
Indo Mining Contracting perf rel to JCI
Estimated overburden (mn bcm) - RHS
Long Term R = 0.1
Coal Price (RHS)
Source: Company data, MEMR, Credit Suisse estimates
Source: Bloomberg
Figure 4: Indonesia—the lowest cost producer for China
Figure 5: Indonesia contributes 40% to total seaborne
market
market
US$/tonne
Mn tonnes 1,000
120
100
Newcastle coal price ($90/t)
900
33
800 700
80 7
600
32
60
500
400
85
40 65
300
50
20
200 100
0 Indonesia
Columbia
-
US (CAPP/NAPP)
FOB Cost
2009 2010 2011 Export volume Production volume
Freight
Source: Credit Suisse estimates, calorific value adjusted
2012E 2013E 2014E Global seaborn coal exports
Source: MEMR, Credit Suisse estimates
Figure 6: Indonesia mining contracting valuation table Price Company
Ticker
United Tractors ABM Investama PT Indika Energy Tbk Delta Dunia Makmur Indonesia mining contracting
UNTR.JK ABMM.JK INDY.JK DOID.JK
TP Upside M Cap
Rtg
(local) (local)
O N O N
21,350 28,000 3,550 3,800 1,620 2,700 250 315
% ($ mn) 31% 7% 67% 26%
8,322 1,021 882 213
P/E (x)
P/B (x)
EV/EBITDA (x) Div Yield (%)
12E
13E
12E
13E
12E
13E
12E
13E
14.7 8.9 4.2 (3.7) 12.9
11.5 7.5 5.7 39.5 11.2
2.7 2.3 1.0 5.2 2.6
2.4 1.8 0.9 4.6 2.2
6.5 5.1 11.9 3.9 6.8
5.0 4.1 8.1 3.3 5.1
3% 0% 7% 0% 3%
3% 0% 9% 0% 3%
Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
2
27 September 2012
Time to re-visit Back to fundamentals On the contrary to the market belief that the share price performance of mining contracting companies correlate to commodity prices, primarily to the coal price in Indonesia, our analysis shows that the long-term correlation is only 0.1. Only recently (over the past five months), they seem to have a strong correlation as both have fallen for different reasons. Coal price fell because of an oversupply situation, not so much on demand, as demand for thermal coal remains strong. However, the share price performance of the mining contracting companies was more affected by the economic slowdown. As Indonesia’s coal mining companies are among the lowest-cost producers and Indonesia is the largest seaborne coal supplier, we still expect growth in output, which would be beneficial to the mining contracting companies.
Low long-term correlation between mining contracting performance and coal price
Long-term growth opportunity We expect to see medium- to long-term growth in Indonesia’s coal production considering that demand for coal remains strong, Indonesian mining companies in general are among the lowest-cost produders, and the importance of Indonesia in the seaborne coal market. Consequently, the growth in mining activities is beneficial for the mining contracting companies. Despite the decline in commodity prices (primarily coal), we have not seen any indication in the decline in mining activites judging from the overburden removal. We expect Indonesia’s coal production to witness a 7% CAGR over the next three years. Consequently, we are confident with the medium to long-term growth of mining contracting activities in the country.
Indonesia mining companies are among the lowest-cost producers, therefore we still expect to see growth in the mining contracting activities
Regulations favour local companies The government of Indonesia is inclined to support local business and new regulations have come out in favour of them. Under the mining law issued in 2009, mining companies have to use local mining contracting companies for their work, unless certain skills or capacity are unavailable in the local market. This has widened the door for growth for the local mining contracting companies. The mining law also requires mining companies not to rely on the mining contracting companies for its mining activities. That is, the mining companies have to take charge of their mining operations. Therefore, there will be changes in the mining contracts, which reflect more like heavy equipment rental, but it would not materially affect the revenue of the mining contracting companies.
The government favours local companies
We prefer United Tractors Our preferred stocks in the sector are United Tractors (UNTR.JK) with an OUTPERFORM rating and a target price of Rp28,000. The share price reflects the downside risk on the heavy equipment sales, and we believe that the mining contracting business, the secondlargest revenue contributor, will remain strong. Our second choice is Indika Energy (INDY.JK) being initiated with an OUTPERFORM rating and a target price of Rp2,700. Indika’s mining contracting is undertaken by Petrosea (PTRO.JK), its subsidiary, the sixthlargest, and the company owns a 46% stake in Kideco, the fourth-largest coal mining company. We initiate ABM Investama (ABMM.JK) with a NEUTRAL rating and target price of Rp3,800. It is an integrated mining company, involved in activities ranging from mining contracting, barging, power supply, and coal mining, and has potential for strong growth. The company belongs to the group which is the sole distributor of Catepillar in Indonesia (not listed). We initiate Delta Dunia with a NEUTRAL rating and a target price of Rp315. Despite the company’s strong operating cash flow, we are concerned with its balance sheet with 8x net debt to equity.
Indonesia Mining Contracting Sector
Our top pick is United Tractors
3
Indonesia Mining Contracting Sector
Figure 7: Regional valuation comparison Price Company Indonesia mining contracting
Ticker
ABM Investama Delta Dunia Makmur PT Indika Energy Tbk United Tractors Regional construction & engineering
Rtg
(local)
TP Upside Mkt cap
P/E (x)
P/B (x)
EV/EBITDA (x) EPS growth (%)
Div Yield (%)
ROE (%)
(local)
%
($ mn)
12E 12.9
13E 11.2
12E 2.6
13E 2.2
12E 6.8
13E 5.1
12E 24%
13E 32%
12E 3%
13E 3%
12E 19%
13E 22%
ABMM.JK DOID.JK INDY.JK UNTR.JK
N 3,550 3,800 N 250 315 O 1,620 2,700 O 21,350 28,000
7% 26% 67% 31%
1,021 213 882 8,322
8.9 (3.7) 4.2 14.7 12.1
7.5 39.5 5.7 11.5 9.2
2.3 5.2 1.0 2.7 1.6
1.8 4.6 0.9 2.4 1.5
5.1 3.9 11.9 6.5 4.6
4.1 3.3 8.1 5.0 4.1
237% 255% 71% -13% 95%
148% -109% -27% 28% 32%
0% 0% 7% 3% 5%
0% 0% 9% 3% 6%
30% -82% 27% 19% 14%
26% 12% 17% 22% 17%
Downer EDI UGL Limited Leighton Holdings Transfield Services Ltd Clough Indonesia coal
DOW.AX UGL.AX LEI.AX TSE.AX CLO.AX
O O N N O
4.10 13.00 17.60 2.05 0.97
12% 23% 6% 15% 35%
1,637 1,837 5,807 961 581
8.0 11.0 13.6 12.5 11.6 10.6
7.5 10.8 9.3 8.7 8.3 10.8
1.1 1.5 2.0 0.9 1.6 3.4
1.0 1.5 1.8 0.9 1.5 3.2
3.2 7.5 3.2 8.6 6.4 6.3
3.1 7.3 2.8 6.6 5.2 6.5
0% 1% 183% -30% -5% -5%
8% 1% 46% 44% 40% -1%
0% 7% 5% 8% 4% 5%
0% 7% 6% 8% 7% 5%
14% 14% 15% 7% 14% 32%
13% 13% 20% 10% 18% 28%
PT Adaro Energy Tbk PT Tambang Batubara Bukit Asam Tbk PT Indo Tambangraya Megah Regional coal
ADRO.JK
N
1,500 1,600 16,250 19,000
7% 17%
5,013 3,912
9.2 11.1
8.8 10.6
1.8 3.9
1.6 3.3
4.9 7.2
4.8 6.7
-1% 9%
5% 5%
4% 5%
5% 5%
20% 35%
18% 31%
PTBA.JK
O 42,050 38,000
-10%
4,965
11.5
13.1
4.7
4.7
6.9
7.9
-21%
-12%
7%
7%
41%
36%
ITMG.JK
N 9.1
10.9
1.3
1.2
4.8
4.8
-12%
-14%
3%
3%
14%
11%
China Shenhua Yanzhou Coal Mining Co. China Coal Energy Co. BHP Billiton Rio Tinto Whitehaven Coal Anglo American Plc Peabody Energy Corp
1088.HK 1171.HK 1898.HK BHP.AX RIO.AX WHC.AX AAL.L BTU
O 29.85 U 11.54 O 7.11 N 33.25 O 53.97 O 2.91 N 1887.5 O 22.94
27% -38% 20% 5% 30% 51% 17% 26%
76,582 7,321 12,160 178,071 92,740 3,073 42,589 6,156
10.3 6.9 9.6 9.8 10.4 28.9 13.2 10.9
10.5 13.4 9.3 11.9 8.3 31.8 10.4 9.8
1.9 1.0 0.9 2.8 1.8 0.4 1.1 1.0
1.7 1.0 0.8 2.5 1.5 0.9 1.1 0.9
5.6 5.3 3.5 6.0 5.0 19.6 5.0 6.6
5.3 6.4 3.0 6.1 4.2 14.2 4.1 5.8
3% -25% -19% -18% -31% -31% -52% -53%
-2% -49% 3% -17% 26% -9% 26% 11%
3% 4% 3% 3% 3% 18% 3% 1%
3% 2% 3% 3% 3% 2% 3% 1%
18% 14% 9% 29% 17% 2% 8% 9%
16% 7% 9% 21% 18% 2% 10% 10%
3.66 10.6 16.53 1.78 0.72
38.00 7.10 8.50 35.00 70.00 4.40 2,200 29.00
Source: Company data, Credit Suisse estimates
27 September 2012
4
27 September 2012
Back to fundamentals The decline in coal price has raised concerns on the mining contracting companies regarding the possibility of mining companies cutting down production and re-negotiating contracts. The market believes that the mining contracting stocks correlate strongly with commodity prices, and particularly with coal price in Indonesia. Some of the major coal mining companies have cut down production and cut capex. However, none of them has reduced the overburden removal activities nor re-negotiated contracts with mining contractors.
The market believes that mining contracting performance correlates to coal price movement
Only in the past five months have we seen the share performance of mining contracting companies to having strong correlation with the coal price movement. They came off at the same time for different reasons. Coal price fell because of an oversupply situation primarily from the US, despite demand remaining strong. Meanwhile, the mining contracting share prices fell more due to the economic slow down and oversupply of heavy equipment in China, in our view. Our analysis shows that the long-term correlation between coal price and the share price of mining contracting companies is low with a correlation of only 0.1. In a rising coal price environment, there is positive sentiment to support the share price movement. However, in a declining coal price environment, the correlation was less than 0.4 or even negative. In addition, we have not seen any decline in overburden removal and no major coal companies in Indonesia have re-negotiated with their mining contractors.
Long-term correlation between mining contracting performance and coal price is 0.1
Figure 8: Correlation of share price performance and coal price R= - 0.24
350%
R= 0.92
R= - 0.54
R = 0.39
300%
$/ton 200 180
250%
160
200%
140
150%
120
100%
100
50%
80
0%
60 Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Coal Price (RHS)
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Indo Mining Contracting perf rel to JCI
Long Term R = 0.1
Source: Bloomberg
The mining contracts are not related to commodity prices. Moreover, revenue of mining contracting companies are not directly related to commodity prices. The concern is on the decline in mining activities. However, considering that Indonesian mining companies are among the lowest-cost producers, we have also seen growth even in the declining commodity prices. In the coal sector, during the low coal price environment, we still expect mining contracting activities to continue their growth as most of the Indonesian coal mining companies are among the lowest-cost producers and remain profitable at low coal prices. We still anticipate mining activities to grow, primarily coal production, which provides opportunity for mining contracting companies to continue their growth. Therefore, we believe it is time to look at the fundamentals.
Indonesia Mining Contracting Sector
Time to focus on fundamentals
5
27 September 2012
Long-term growth opportunity Indonesia’s coal production has been witnessing a 12% CAGR since 2007. We expect demand for coal to increase from China and India. Indonesia being the largest seaborne coal supplier wth a 40% share of total seaborne exports and among the lowest-cost producers, we expect coal output to continue growing accordingly. Indonesia’s coal output was 398 mn tonnes in 2011. We expect this to grow to 519 mn tonnes by 2014, or a 10% CAGR. Domestic consumption is also expected to witness a 5% CAGR until 2014, and the seaborne coal import a 5% CAGR during the same period. Figure 9: Seaborne coal exports
Figure 10: Seaborne coal imports
In million tonnes
In million tones Australia
35
RoW
Indonesia
India
35
30
30
25
25
20
20
15
15
10
10
5
5
0
RoW
China
0 2011
2012
2013
2014
2015
Source: MEMR, Credit Suisse estimates
2011
2012
2013
2014
2015
Source: MEMR, Credit Suisse estimates
Coal demand is expected to grow more from China and India. Currently, their imports account for 18% and 12% of total seaborne coal imports, respectively. This is expected to grow to 23% and 17%, respectively in 2015, totalling 40% of total seaborne coal imports. We expect seaborne imports to witness a 5% p.a. CAGR during the period. With a total output of 491 mn tonnes expected in 2014, assuming an average strip ratio of 8x, this translates to total overburden of 3.9 bn bcm. Pama Persada, the subsidiary of United Tractors (UNTR), is the largest national mining contractor, has the capability for overburden of around 800 mn bcm per annum. Therefore, to be able to move 3.9 bn bcm of overburden, it requires 5x of Pama’s size. Consequently, the opportunity to grow in the mining contracting remains high.
Demand for mining contracting continues to growth
Figure 11: Coal and overburden Production volume (mn tonnes) Estimated total overburden (mn bcm) Estimated no of fleets Estimated additional no of fleets Estimated investment requirement (US$mn)
2009
2010
2011
2012E
2013E
2014E
290 2,316 421
354 2,832 515 94 1,032
398 3,183 579 64 702
429 3,429 623 45 492
460 3,683 670 46 509
491 3,928 714 45 490
Source: MEMR, Company data, Credit Suisse estimates.
One fleet consists of one excavator, five dump trucks and 0.5 bulldozer, capable of moving 5-6 mn bcm per year. To move 3.9 bn bcm of earth, it requires 714 fleets. With additional 1 bn bcm of earth to be moved, the sector needs additional 130 fleets (845 units of heavy equipment). If one fleet needs an investment of around US$10-12 mn, the investment to add heavy equipment would be around US$2 bn in four years, or around US$550 mn investment per year. In the past, the mining contracting activities were dominated by foreign mining contracting companies, such as Thiess. As the government requires the use of local or national mining
Indonesia Mining Contracting Sector
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27 September 2012
contracting companies, we see more local names in the sector. Pama is the largest national mining contracting company. Buma, under Delta Dunia (DOID) is the second largest. Figure 12: UNTR is the largest mining contracting
Figure 13: UNTR—much larger than the next competitor
company
Million bcm
45%
900
42%
40%
792
800
35%
700
30%
600
25%
500
20%
16%
15%
15%
334
300
9%
10%
400
6%
5%
5%
4%
3%
200
118
116
100
0%
UNTR
DOID
Thiess Leighton
Source: United Tractors
SIS
INDY Dharma Others Henwa
0
ABMM
DOID
INDY
UNTR
Source: Company data
Although coal demand in general remains in line with expectation, we are concerned with the high level of inventory at power plants in major coal importing countries and the use of hydropower plants in China and slowdown in the overall economy. We underestimated oversupply of coal due to the impact of shale gas in the US, which freed up coal from the US and Colombia, the traditional exporter of coal to the US. With overcapacity of capsize ships causing a decline in freight rate, it has enabled the US and Colombian coal producers to ship their coal to Asia. Newcastle coal price fell to the lowest level of US$80/t level, but it has recovered to US$90/t currently. Our global commodity team is expecting coal prices to recover in 4Q12 and to go up to US$100/t in 2013. However, considering the size of oversupply in the US and Colombia, and the high inventory level in China, we expect coal prices to stay at the current level for a while, until we see a significant cut in global coal production by high-cost producers.
Coal price may stay low but mining activities will continue to grow
In a lower coal price environment, mining companies will start moving operations to areas with a lower strip ratio to reduce cost per tonne. If coal price continues to remain low for longer-than-expected periods, these companies will start cutting down production. In the case of a stand-by condition, mining contracting companies will receive compensation as normally stated in the contract. Although moving to a lower strip ratio area also means lower overburden removal.
Short-term slow down during low price environment
Indonesia mining companies are among the lowest cost producers
Mining costs have increased over time primarily due to longer hauling distances, an increasing strip ratio, and also increasing oil price. The increase in oil price is passed through to the mining companies. Increasing hauling distance is normally reflected in the contract, but for some contracts it could be beneficial for mining companies. The inefficiency in equipment use could become the burden of mining contracting companies. However, up to this moment, we have not heard any major coal mining companes announcing re-negotiation of contracts with mining contracting companies although some of them have cut production and delayed expansion projects. We consider that the risk of this to happen is with low-grade coal producers and small coal miners, rather than the high-grade producers and large mining companies.
Risks more on low grade and small coal producers
Indonesia’s coal mining companies are among the lowest-cost producers, consequently, they are likely to remain profitable at the low coal price environment. There could be some short-term slowdown in terms of their mining activities. However, we still expect mining activities to grow in the medium to long term.
Indonesia Mining Contracting Sector
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27 September 2012
Figure 14: Cost of producers for China market
Figure 15: Cost of producers for Europe market
US$/tonne
US$/tonne
120
120 33
100
100
80 60 40
7
22
32
60
85 65
40 20
0
Indonesia
Columbia FOB Cost
85
80
60
50
20
9.5
10
80
0
US (CAPP/NAPP)
Russia
Freight
US (CAPP/NAPP) FOB cash cost
US Illinois* Freight
Source: Credit Suisse estimates; calorific value adjusted
Source: Credit Suisse estimate. * Has 3% sulphur, priced at 15% disc to API
Figure 16: Average selling price vs cash cost
Figure 17: Indonesia coal output
US$/tonne
Million tonnes 1,000
120
900
100
800
80
700
60
600 500
40
400
20
300 200
ADRO
SAKR
PTBA
Cash cost ex SGA& royalty Railway cost ASP ($/t)
HRUM
ITMG
100
Royalty SGA
2009 2010 2011 Export volume Production volume
Source: MEMR, Credit Suisse estimates
2012E 2013E 2014E Global seaborn coal exports
Source: MEMR, Credit Suisse estimates
In all heavy equipment areas, Komatsu (under United Tractors) has the highest market share of over 40% with the largest market share in the mining sector of over 50%. Komatsu also has the largest market share in the agro equipment with over 40% market share. Figure 18: Heavy equipment market share in Indonesia Komatsu (UNTR) Caterpillar Hitachi Kobelco Others
Mining
Agro
Construction
Forestry
Total
51% 22% 12% 5% 10%
43% 15% 33% 9% 0%
34% 21% 25% 20% 0%
25% 5% 44% 26% 0%
44% 19% 21% 10% 6%
Source: Company data, Total market 5,010 equipments
Indonesia Mining Contracting Sector
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27 September 2012
Figure 19: Heavy equipment market share in 2011
Figure 20: Increasing competition in 6M12 6M12
FY2011 Others 8%
Kobelco 12%
Kobelco 10%
Hitachi (HEXA) 15%
Komatsu (UNTR) 49%
Caterpillar 18%
Source: Company data, Total market 17,360 pieces of equipment
Others 5%
Komatsu (UNTR) 44%
Hitachi (HEXA) 20%
Caterpillar 19%
Source: Company data, Total market 5,010 pieces of equipment
The replacement cycle of mining equipment is normally five years. However, some companies use equipment for 10 years. Some coal mining companies have cut their capex programme primarily for the heavy equipment capex. We have seen the decline in heavy equipment sales. However, judging from the coal output from Indonesia, we still expect growth in mining contracting work. The impact of shale gas has freed up coal from the US and also from Colombia, as the US also imports some coal from Colombia. The oversupply has been enough to disrupt the Newcastle spot coal price, which fell from the high of US$115/t to US$81/t the lowest. Demand for coal remains strong, but oversupply has caused coal price to fall to the level where high cost producers should be out of the market. We have seen some Indonesian coal companies cutting production targets for this year and growth as well, considering the current market condition. However, we have not seen anyone re-negotiating mining contracts, although there is an indication that new contracts would not be priced higher than the current contracts. The worst case is that mining contractors would be paid a stand-by fee as the mining companies really cut their operations significantly.
The worst case is to get stand-by fee
Some mining companies have cut their capex programmes, and it affects primarily the heavy equipment considering that they also cut production targets. In addition, some of the mining companies are also building conveyer belts to reduce costs, hence reducing the use of trucks. We have seen the decline in heavy equipment sales. The 1H12 heavy equipment sales from United Tractors (UNTR) were down 2% YoY to 4,333, lower than market expectation.
Cut capex on heavy equipment
Indonesia Mining Contracting Sector
9
27 September 2012
Regulation favours local companies Under the mining law issued in 2009 (issued in Jan 2009), mining companies have to use local or national mining contracting companies, which provide services ranging from feasibility study, transportation, and mining and processing. Although by hiring a third party mining contractor, a mining company remains responsible to the overall mining activities. A mining company is not allowed to use a subsidiary or an affiliated company to conduct the mining activities, with the exception that they get approval from the Minister of Mining and Energy. The Minister’s permit can be given under the condition of that no other mining contracting company has the right capability in the area.
Opportunity to grow for local mining contracting companies
The Minister of Mining and Energy issued a decree 28/2009 regarding the mining contracting services to follow up the mining law. The decree is for the implementation of the new law. The mining company is responsible for the mining activities, which when translated means taking responsibility for the capital expenditure for providing heavy equipment. This is currently borne by the mining contracting company. However, mining contracting companies indicate that there won’t be any changes to the way they work. What might change is the wording in the contracts - it could be presented as if the mining companies lease the assets of the mining contracting companies. In addition, the contracts will be based on the overburden removal only, and not related to coal production. We do not expect any significant change in mining companies’ revenue stream as they will comply with the law.
There could be change in contract to comply with the regulation
Considering the common practice, mining contracting companies are the ones having the human resources to conduct mining activities, including mining plan. This indicates that there is a requirement to use local/national mining contracting companies, local subcontractors, and hire local workers.
But no change in the activities as mining contracting companies have the control over human resources and equipment
In the mining contracts, mining contracting companies do not stand to benefit from the increases in commodity prices directly. However, higher commodity prices encourge more mining activities, and vice versa. This would affect the size of overburden, thus benefitting the mining contracting companies. The mining contracting activities are now limited to removing the overbuden; and transportation of minerals and coal. In the past, a mining contracting company involved up the mining plan. For mineral or coal mining activities, they have to be conducted by the mining companies themselves. For the existing contracts, mining companies are given three years to comply with the Ministerial Decree by September 2012. We do not expect any significant changes in mining contracting companies’ operations and revenue stream following the compliance of the new regulation. Mining companies have control over their workers and equipment, therefore, they’d likely be able to retain their position. Two recent major changes in the mining regulations are: ■ Limitation of foreign ownership to 49%, down from 80% previously. This will be applied for IUP holders and they will be given a 10-year target for completion, starting ‘year 5’ of operation. Contract of work (COW) holders are exempted from this regulation before the expiry of the COW.
Indonesia Mining Contracting Sector
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27 September 2012
Figure 21: Divestment schedule Year
Min. Local portion
1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th
not yet required not yet required not yet required not yet required not yet required 20% 30% 37% 44% 51%
Source: Ministry of Energy and Mineral Resources
■ Export tax on raw ores. The government is imposing export tax for 14 raw ores, excluding coal to discourage raw ores export, prior to the total ban in 2014, as required by the mining law. The intention of the total ban on ore exports is to encourage mining companies to have processing facilities in the country. The threat on the coal sector in relation to government’s regulation would be a limitation on exports to ensure availability of coal in the domestic market for energy security purposes. At the moment, the government has applied DMO (domestic market obligation), which is set on an annual basis. Other two options are limiting the calorific value of coal which can be exported and export tax. We do not expect the last two to be applied in the near term. The industry expectation is that Indonesia’s coal output would reach a plateau of 500 mn tonnes p.a., otherwise it would be mined at a significantly higher cost considering the location, distance and difficulties in getting the coal out. This would translate to a higher strip ratio. Although the coal output would be maintained at 500 mn tonnes p.a., the amount of overburden could gradually increase.
Indonesia Mining Contracting Sector
Longer distance, higher strip ratio translate to higher contracts values
11
27 September 2012
We prefer United Tractors Our prefered stocks are United Tractors and Indika Energy. We have an OUTPERFORM rating for United Tractors (UNTR.JK) with a target price of Rp28,000/share. The share price has reflected the downside risk on heavy equipment sales. However, we believe that the mining contracting activites will remain strong.
Our top pick is United Tractors
We have an OUTPERFORM rating for Indika (INDY.JK) with a target price of Rp2,700/share. The income is supported primarily by its coal subsidiary, Kideco, which produces high quality coal with efficient operation and strong balance sheet. ABM Investama (ABMM.JK) is a smaller mining contracting company, with other businesses including the power rental, which is probably the largest in the country; two coal mining areas, and other related services. We rate ABM with a NEUTRAL rating and a target price of Rp3,800/share. It is part of the Trakindo group, the sole distributor of Catepillar in Indonesia.
ABM is a growing company
Delta Dunia (DOID.JK) needs to restructure its balance sheet. Although its EBITDA remains sufficient to service debts, it would need to replace equipment to overcome operating inefficiency. DOID’s share price collapsed, reflecting the concerns. Consequently, we rate the stock as NEUTRAL with a target price of Rp315/share. Figure 22: Positives and negatives Positives
Negatives
ABM Investama
In the growing stage, integrated mining related activities Power business more stable revenue and earnings Future growth is from two coal mining
Delta Dunia
The second largest mining contracting company with good track record Acquisition of new heavy equipment should improve the efficiency Long-term experience in construction, under Tripatra, and mining contracting under Petrosea, the sixth largest mining contracting company Earnings supported by Kideco, a coal mining company with high grade coal, efficient operation and strong balance sheet The largest mining contracting company Efficient operation Strong support from heavy equipment Good corporate governance
Indika
United Tractors
A smaller and new player with no track record, need time to build investors confident No competitive advantage in mining contracting and coal mining, other than the power rental. Balance sheet issues with net debt to equity of 8x Double declining depreciation hurts earnings as they have new equipments Thin top line as they are from mining related services Major earnings driver below operating profit line Expertise is at the subsidiaries/affiliates companies
Hit by decline in heavy equipment sales Coal mining is small and high cost
Source: Credit Suisse
Figure 23: Summary of recommendations Price (local) 3,550
TP (local) 3,800
Upside % 7%
N
250
315
26%
INDY.JK
O
1,620
2,700
67%
UNTR.JK
O
21,350
28,000
31%
Company
Ticker
ABM Investama
ABMM.JK
Rtg N
Delta Dunia Makmur
DOID.JK
PT Indika Energy Tbk
United Tractors
Comment Based on sum of parts, we value the mining contracting and services at 4x EV/EBITDA; and coal mining at 7x P/E for 2013, a 30% and 20% discount to the sector average, respectively. Based on EV/EBITDA target of 4x or 30% discount to the sector average to address the balance sheet risk. Based on sum of parts valuation with EV/EBITDA target for mining contracting and services of 6x, and P/E target of 6x for the coal mining, which is at a 30% discount to the sector average to reflect the holding company discount. Based on SOTP, with FY13 EV/EBITDA target of 7.5x for heavy equipment, 6.0x for mining contracting services, and 5.5x for coal mining.
Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
12
27 September 2012
Asia Pacific / Indonesia Diversified Metals & Mining
ABM Investama (ABMM.JK / ABMM IJ) Rating NEUTRAL* Price (25 Sep 12, Rp) 3,550.00 Target price (Rp) 3,800.00¹ Upside/downside (%) 7.0 9,773,736 (US$ Mkt cap (Rp mn) 1,021) Enterprise value (US$ mn) 1,488 Number of shares (mn) 2,753.17 Free float (%) 21.8 52-week price range 3,975.0 - 3,375.0 ADTO - 6M (US$ mn) 0.19 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.
Research Analysts Ami Tantri 62 21 2553 7976
[email protected] Dian Haryokusumo 62 21 255 37974
[email protected] Contribution by Anindito Widyanarendra
[email protected]
In the growing stage
Dian Haryokusumo 62 21 255 37974
[email protected]
■ Initiating on ABM Investama with a NEUTRAL rating: We initiate coverage of ABM Investama (ABMM) with a NEUTRAL rating and Rp3,800 target price, with 7% potential upside. Being a relatively small mining contracting company with other mining and power services, and coal operation that has just begun, ABMM has no competitive advantage in the sector, under a pressurised coal price environment. However, there is a potential for strong growth in the business in the medium to long term. ■ Diversified business lines: The main contributors to earnings are the mining contracting activities and power services. Coal mining, which recently started in two main areas with low-grade coal, will have minimum contribution for the time being in the low coal price environment. However, this will be the future growth of the company, in our view. The power rental business can potentially offset the decline in coal-related activities, as it is a more sustainable and stable business. ■ Earnings momentum tends to be negative: ABM is a relatively small company. In a low coal price environment, the company has been affected more considering that its clients tend to be smaller coal mining companies. Therefore, we expect disappointing 3Q12 results, which would have negative sentiment on the share price. However, we remain confident with the company’s future growth potential despite the short-term slowdown. ■ Key risks: Our Rp3,800 target price is based on sum of the parts; we value the mining contracting and services at 4x EV/EBITDA and coal mining at 7x P/E for 2013E, a 30% and 20% discount to the sector average, respectively. The risks to our valuation and rating are lower-than-expected coal price, mining contracting volume, and rate.
Share price performance 4000
Price (LHS)
Rebased Rel (RHS)
3800 3600 3400 Dec-11
Apr-12
120 110 100 90 80
Aug-12
The price relative chart measures performance against the JSX COMPOSITE INDEX which closed at 4226.89 on 25/09/12 On 25/09/12 the spot exchange rate was Rp9570./US$1
Performance Over Absolute (%) Relative (%)
1M -1.4 -3.4
3M 1.4 -6.0
12M — —
Financial and valuation metrics Year Revenue (US$ mn) EBITDAX (US$ mn) EBIT (US$ mn) Net profit (US$ mn) EPS (CS adj.) (US$) Change from previous EPS (%) Consensus EPS (US$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDAX (x) P/B (x) ROE (%) Net debt/equity (%)
12/11A 753.1 138.2 74.6 47.2 0.02 n.a. n.a. 190.6 21.6 0 9.8 3.0 20.4 100.3
12/12E 891.3 290.0 184.1 117.1 0.04
12/13E 1,008.9 341.0 215.3 138.4 0.05
12/14E 1,182.2 426.4 287.6 197.5 0.07
0.04 147.9 8.7 0 5.1 2.2 29.6 102.7
0.07 18.2 7.4 0 4.1 1.7 26.4 65.9
— 42.7 5.2 0 2.8 1.3 28.5 21.5
Source: Company data, Thomson Reuters, Credit Suisse estimates
Indonesia Mining Contracting Sector
13
27 September 2012
Focus charts Figure 24: Share price performance vs coal price
Figure 25: Revenue breakdown In US$ mn US$/t 125 120 115 110 105 100 95 90 85 80
R= 0.67
10%
5% 0% -5% -10% -15% -20% -25%
1,000 800 600 400 200
Sep-12
Aug-12
Jul-12
Jun-12
May-12
Apr-12
Mar-12
Feb-12
Jan-12
Dec-11
ABMM rel perf to JCI
1,200
0 2009
Coal Price (RHS)
2010
Mining contracting
2011
2012E
Coal operation
2013E
Power solution
2014E
Others
Source: Bloomberg
Source: Company data, Credit Suisse estimates
Figure 26: Overburden removal
Figure 27: Coal production from mining contracting
In mn bcm
In mn t
160
16
140
14
120
12
100
10
80
8 6
60
4
40
2
20
-
0
2008 2008
2009
2010
2011
2012E
2013E
2009
2010
2011
2012E
2013E
2014E
2014E
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
Figure 28: Coal production
Figure 29: Coal price, mining fee US$
6 5
140
4.0
120
3.5
100
4
80
3
60
3.0 2.5 2.0
40
2
1.5
20
1 0
1.0 2009
0 2009
2010
2011 TIA
2012E MDB
Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
2013E
2014E
2010
2011
Mining fee (RHS)-US$/bcm
2012E
2013E
Newcastle price
2014E ASP
Source: Company data, Credit Suisse estimates
14
27 September 2012
Growth opportunity ABM Investama is a member of the Tiara Marga Trakindo group established in 1970 by AHK Hamami. Trakindo is the sole authorised dealer for Catepillar (CAT) since 1971 in Indonesia, and has Freeport Indonesia as its major customer. Trakindo (not listed) now has 70 branches. ABM Investama is primarily involved in the mining contracting business, renting power generators to PLN (mostly diesel-fired) and coal production. It is also involved in engineering services and integrated logistic (barges). The company’s main revenue contributors are the mining contracting business and the power solution; and it intends to grow coal production from two areas—in Kalimantan and in Aceh—which were recently acquired. Figure 30: ABM Investama organisation structure ABM Investama
Sumberdaya Sewatama Power Solutions 99.98%
Cipta Kridatama Mining Contracting 99.99%
Reswara Coal Mining 99.99%
Meppogen 20%
Tunas Inti Abadi 99.99%
Nagata Bisma Shakti 99.9%
Pelabuhan Buana Reja 99.99%
Pradipa Aryasatya 99.9%
Sanggar Sarana Baja Engineering Services 99.96%
Prima Wiguna Pratama 99.98%
Cipta Krida Bahari Integrated logistics 99.99%
Baruna Dirga Dharma 99.9%
Alfa Trans Raya 99.9%
Media Djaya Bersama 70.0%
Bara Energy Lestari 99.99%
Mifa Bersaudara 99.99%
Source: Company data
Mining contracting services The mining contracting service is done by PT Cipta Kridatama (CK), which is the fifthlargest mining contracting company in terms of overburden removal. The company has a fleet of 428 pieces of heavy equipment, servicing seven customers, primarily located in Kalimantan and one in the southern part of Sumatra. The heavy equipment is supplied by Catepillar, Liebherr, Hitachi and Terex. With increasing demand for coal and higher production, the company expects growth in the mining contracting business. The company plans to spend US$119 mn of capex this year and US$62 mn over the next year to add new equipment for the growth of this segment.
Power solutions This is under PT Sumber Daya Sewatama (SS) which has 745 diesel power generators and five gas-fired power generators. These are rented out to PLN, the state-owned power
Indonesia Mining Contracting Sector
15
27 September 2012
company, in areas where PLN has no major power supply. These power generators are portable and can be relocated. The combined capacity is 884MW. The company also intends to take a minority interest in small IPP projects and expand the O&M (operating and management) in power plants. PLN has a 10,000MW power plant project, of which 4,000MW has been completed. In the meantime, a second 10,000MW power project has also been launched. This is a threat to ABMM’s power solution business. However, the company believes that there are areas in Indonesia which cannot be supplied to by the main grids considering their remote locations.
Coal production Coal production is under PT Reswara Minergi Hartama (RMH), which owns a 99.99% stake in PT Tunas Inti Abadi (TIA), located in South Kalimantan. Other coal producing areas lie in the southern part of Aceh, under two sub-holdings through PT Media Djaja (MDB)—PT Bara Energi Lestari (BEL) and PT Mifa Bersaudara (MIFA). ABMM owns 70% of MDB, which owns 99.99% stake in both, BEL and MIFA. The combined estimated reserves are 221 mn tonnes and resources are at 561 mn tonnes. Figure 31: Estimated reserves and resources In mn tonne Area
Reserves
Resources
Proved
Probable
Total
Measured
Indicated
Inferred
Total
13 7
39 162
52 169
32 18
39 289
35 148
106 455
20
201
221
50
328
183
561
TIA ADB Source: Company data
TIA has been producing coal since 2009. Last year, production was 1.7 mn tonne. MDB areas are still only preparing for their first production, and are expected to start this year with around 0.5 mn tonne output. This is expected to grow to 5 Mtpa in three years. There are two IUPs under TIA, one each under BEL and MIFA. The coal quality is low with calorific value between 3,400kcal/kg and 3,960kcal/kg (GAR). Therefore, the selling price has been at a significant discount to the benchmark coal price. In addition to coal production, RMH also owns 99.99% of a port operator (PT Pelabuhan Buana Reja—PBR). PBR has a 900 metres loading conveyer with capability to transport 5 Mtpa of coal per year. The port has two loading facilities for 300 ft barges (8,000 tonnes), with stock pile of 120,000 tonnes. This is an area of growth for the company, especially when coal operations are still at an early stage. The company plans to spend US$62 mn in 2012 and US$37 mn in 2013 as capital expenditure for this segment.
Engineering services and integrated logistics Engineering operations are conducted by PT Sanggar Sarana Baja (SSB) offering various services under four divisions. The integrated logistics for coal transportation is done by PT Cipta Krida Bahari (CKB). Figure 32: Engineering services Divisions
Services
Transport equipment division Site services division Fabrication division
Designing, manufacturing, and distributing products for transportation and material handling business On-site repair, process plant maintenance and construction services Design and manufacture of process equipment, general fabrication, sie construction and installation solutions Salvaging, remanufacturing, and manufacturing of heavy equipment core components
Re-manufacturing division Source: Company data
Indonesia Mining Contracting Sector
16
27 September 2012
NEUTRAL rating, TP at Rp3,800 There is a risk for mining contracting activities to be lowered, given the low coal price environment, as coal companies have become less aggressive in expanding their production. Contract re-negotitation is possible, although it has not happened yet. The risk is more for small coal mining companies; no major coal company has announced any capex delays or production cuts as yet. We have a NEUTRAL rating for ABMM as it seems the market has too much expectation of its growth. Our target price is Rp3,800/share based on sum of parts valuation of the mining contracting and other services, and coal mining business. We value the mining contracting business and other related services at 4x EV/EBITDA or at a 30% discount to the sector average considering it is a small mining contracting operation, and for the coal business at 7x P/E target, or at a 20% discount to the sector average. Our target price provides a 7% potential upside to the current share price, putting the stock into our NEUTRAL territory. Figure 33: Valuation summary In US$ mn Description
Amount
Mining contracting and other services EV/EBITDA target (x) EBITDA 2013 Enterprise value
4 296 1,182
Coal mining P/E target (x) Earnings 2013 Equity value
7 46 328
Total
1,510
Net debt Minority interest Equity value
390 (2) 1,121
Equity value (Rpbn) Target price (Rp) Upside
10,654 3,800 7%
Source: Credit Suisse estimates
Risks The risks to our valuation and rating are lower-than-expected overburden removal coal price, and coal output. We are confident about the company’s strategy for growth. We would consider buying the stock if there is any downward correction in the share price.
Indonesia Mining Contracting Sector
17
27 September 2012
ABM Investama ABMM.JK / ABMM IJ Price (25 Sep 12): Rp3,550.00, Rating:: NEUTRAL, Target Price: Rp3,800.00, Analyst: Ami Tantri Target price scenario Scenario Upside Central Case
TP
%Up/Dwn Assumptions
3,800.0 0
Downside Income statement (US$ mn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (US$ mn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (US$ mn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity
7.04 12/11A 753 596.0 81.7 (62.8) 138.2 63.6 74.6 21.8 0.03 — 52.8 — 5.9 46.9 — (0.3) — 47.2 — 47.2 12/11A 74.6 (19.5) (5.6) (70.7) 38.1 16.8 (176.3) (159.4) — (74.7) — — (24.7) (275.6) 168.2 — 230.7 — 399.0 140.1 — 140.1 12/11A 204.6 174.3 45.8 46.2 470.9 441.8 6.6 68.9 106.3 1,094 153.9 150.4 — 41.5 345.7 393.1 — 17.7 757 337.7 0.1 1,094
12/12E 891 625.1 81.7 (105.5) 290.0 105.9 184.1 29.0 — — 155.1 — 38.8 116.3 — (0.8) — 117.1 — 117.1 12/12E 184.1 (29.0) (29.6) (24.1) 105.9 207.3 (335.0) (127.7) — — — — — (335.0) — — 200.0 — 200.0 72.3 — 72.3 12/12E 276.9 203.7 48.0 46.2 574.8 670.9 6.6 68.9 97.1 1,418 161.4 150.4 — 41.5 353.2 593.1 — 17.7 964 454.9 (0.7) 1,418
12/13E 1,009 711.9 81.7 (125.8) 341.0 125.8 215.3 32.0 — — 183.3 — 45.8 137.5 — (1.0) — 138.4 — 138.4 12/13E 215.3 (32.0) (35.0) (11.3) 125.8 262.7 (186.0) 76.7 — — — — — (186.0) — — — — — 76.7 — 76.7 12/13E 353.6 230.8 54.7 46.2 685.2 731.1 6.6 68.9 86.3 1,578 183.8 150.4 — 41.5 375.6 593.1 — 17.7 986 593.3 (1.6) 1,578
12/14E 1,182 808.9 85.8 (138.8) 426.4 138.8 287.6 26.1 — — 261.5 — 65.4 196.1 — (1.4) — 197.5 — 197.5 12/14E 287.6 (26.1) (50.0) (21.2) 138.8 329.1 (108.5) 220.6 — — — — — (108.5) — — — — — 220.6 — 220.6 12/14E 574.2 269.6 62.2 46.2 952.1 700.8 6.6 68.9 70.9 1,799 208.8 150.4 — 41.5 400.6 593.1 — 17.7 1,011 790.8 (3.0) 1,799
Key earnings drivers Overburden removal (mn Newcastle coal price bcm) (USD/t) Coal mining production vol (mn t)
12/11A 118.0 123.0 2.16 — —
12/12E 126.3 98.0 2.50 — —
12/13E 133.8 100.0 3.50 — —
12/14E 140.5 110.0 5.00 — —
Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (US$)(US$) DPS BVPS (US$) Operating CFPS (US$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)
12/11A 2,753 0.02 — 0.12 0.01 12/11A
12/12E 2,753 0.04 — 0.17 0.08 12/12E
12/13E 2,753 0.05 — 0.22 0.10 12/13E
12/14E 2,753 0.07 — 0.29 0.12 12/14E
52.4 114 237 191
18.4 147 148 148
13.2 17 18 18
17.2 34 43 43
18.3 9.9 7.0 6.3
32.5 20.7 17.4 13.1
33.8 21.3 18.2 13.7
36.1 24.3 22.1 16.7
21.6 3.02 — 60.7 1.81 9.8 18.2
8.7 2.25 — 4.9 1.67 5.1 8.1
7.4 1.72 — 3.9 1.40 4.1 6.6
5.2 1.29 — 3.1 1.01 2.8 4.1
20.4 13.7 0.69 0.71 0.89 3.24
29.6 17.3 0.63 0.84 0.75 3.12
26.4 17.0 0.64 0.85 0.75 2.67
28.5 22.3 0.66 0.91 0.75 2.28
100 2.45 3.4
103 1.61 6.4
66 1.14 6.7
21 0.40 11.0
Source: Company data, Thomson Reuters, Credit Suisse estimates 12MF P/E multiple 7.00 6.80 6.60 6.40 6.20 6.00 5.80 5.60 Jul-12
Aug-12
Sep-12
12MF P/B multiple 1.95 1.90 1.85 1.80 1.75 1.70 Jul-12
Aug-12
Sep-12
Source: IBES
Indonesia Mining Contracting Sector
18
27 September 2012
Asia Pacific / Indonesia Diversified Metals & Mining
Delta Dunia Makmur (DOID.JK / DOID IJ) Rating NEUTRAL* [V] Price (25 Sep 12, Rp) 250.00 Target price (Rp) 315.00¹ Upside/downside (%) 26.0 Mkt cap (Rp bn) 2,042.12 (US$ 0.21) Enterprise value (Rp bn) 9,987 Number of shares (mn) 8,168.49 Free float (%) 59.9 52-week price range 740.0 - 235.0 ADTO - 6M (US$ mn) 0.89 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts Ami Tantri 62 21 2553 7976
[email protected] Dian Haryokusumo 62 21 255 37974
[email protected] Contribution by Anindito Widyanarendra
[email protected] Dian Haryokusumo 62 21 255 37974
[email protected]
Needs balance sheet restructuring
■ Initiate on Delta Dunia Makmur with a NEUTRAL rating: We initiate coverage of Delta Dunia (DOID) with a NEUTRAL rating and a target price of Rp315. Although DOID owns Buma, the third-largest mining contracting company which generates strong EBITDA, we are concerned about the company’s balance sheet condition with net debt-to-equity of 7x. ■ Downside risks on the mining contracting activities: The recent investment at Buma level (not listed), the mining contracting subsidiary, should have improved the efficiency of the operation. However, we have also heard Buma’s operation to be underperforming which may be because mining companies change plans or reduce activities. Despite all that, we still expect the company to generate strong cash flow, which should be more than sufficient to service its debt. ■ Balance sheet restructuring: Although it has strong EBITDA to service debt, with net debt-to-equity at 7x, Delta Dunia needs to restructure its balance sheet, in our view. There is value left for shareholders, however, we do not expect any dividend payment. ■ Key risks: Our Rp315 target price is based on EV/EBITDA target of 4x for 2013 or 30% discount to the sector average to address the balance sheet risk. The key risks to our valulation and rating are lower-than-expected overburden removal, and lower mining contracting rate. We believe the share price already reflects these risks, and we would be a buyer of this stock if there will be any balance sheet restructuring.
Share price performance Price (LHS)
Rebased Rel (RHS)
2000 1500 1000 500 0 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12
200 150 100 50 0
The price relative chart measures performance against the JSX COMPOSITE INDEX which closed at 4226.89 on 25/09/12 On 25/09/12 the spot exchange rate was Rp9570./US$1
Performance Over Absolute (%) Relative (%)
1M -7.4 -9.4
3M -37.5 -44.9
12M -61.5 -89.0
Financial and valuation metrics Year Revenue (Rp bn) EBITDA (Rp bn) EBIT (Rp bn) Net profit (Rp bn) EPS (CS adj.) (Rp) Change from previous EPS (%) Consensus EPS (Rp) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/11A 6,820.7 2,043.3 669.2 -153.4 -19.55 n.a. n.a. n.m. -12.8 0 4.2 2.2 -33.5 690.4
12/12E 8,362.4 2,533.8 503.7 -544.4 -66.82 n.m 22.4 n.m. -3.7 0 3.9 5.2 -81.8 2,017.7
12/13E 9,264.7 2,630.2 292.0 51.6 6.33
12/14E 10,160.1 2,564.0 785.6 236.0 28.96
48.0 n.m. 39.5 0 3.3 4.6 12.3 1,481.0
91.4 357.2 8.6 0 3.0 3.0 41.9 836.0
Source: Company data, Thomson Reuters, Credit Suisse estimates
Indonesia Mining Contracting Sector
19
27 September 2012
Focus charts Figure 34: Share price performance vs coal price
Figure 35: Mining fee vs coal and oil prices US$/unit
R= 0.28 250%
R= - 0.14
US$/t 150 140 130 120 110 100 90 80 70 60
R= 0.85
150%
50% -50% -150% -250% -350%
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
DOID rel perf to JCI
140
2.6
130
2.5
120
2.4
110
2.3
100 2.2
90
2.1
80
2.0
70 60
1.9 2009
Coal Price (RHS)
Long Term R = - 0.36
2010
2011
Coal price US$/t
2012E
2013E
Oil price US$/bbl
Unit fee-RHS US$/bcm
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
Figure 36: Overburden removal
Figure 37: Coal production
In mn bcm
In mn tones
500
50
450
45
400
40
350
35
300
30
250
25
2014E
20
200
15
150
10
100
5
50
0
0 2001
2003
2005
2007
2009
2011
2001
2013E
2003
2005
2007
2009
2011
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
Figure 38: Strip ratio
Figure 39: Mining fee vs cash cost
x
US$/bcm 10.0
2013E
3.0
9.5
2.5
9.0 8.5
2.0
8.0 1.5
7.5 7.0
1.0
6.5 0.5
6.0 5.5
0.0 2010
5.0 2001
2003
2005
2007
2009
Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
2011
2013E
Fuel cost
2011 Cash COGS
2012E
2013E
Cash opex
2014E Mining fee
Source: Company data, Credit Suisse estimates
20
27 September 2012
Reducing financing costs Delta Dunia (DOID.JK) started business as a property company. It acquired Buma, the third-largest mining contracting company in Indonesia, and mining contracting has now become the focus for DOID. As a result of growing coal production in Indonesia, Buma’s overburden removal has also been growing strongly at 19% CAGR over the past 11 years. Coal output too has been growing at 16% CAGR during the same period with a strip ratio of 7x. Delta Dunia’s services cover overburden removal, coal mining, and hauling.
Strong growth in overburden removal with 19% CAGR in 11 years
Its customers are major coal mining companies, including Adaro (ADRO.JK), Berau Coal (BRAU.JK), Bayan (BYAN.JK), Arutmin and KPC under Bumi Resources (BUMI.JK), and Kideco under Indika (INDY.JK). Buma’s management and man-power came from Pama (under United Tractor, UNTR.JK). Consequently, their technical know-how is comparable with Pama.
Servicing major coal mining companies
Figure 40: Customers
Figure 41: Strip ratio x Berau 27%
12.0
Dewa 4% Bayan 15%
Kideco 15%
Arutmin 10%
Lanna 4% Adaro 14%
Source: Company data
Others 11%
11.0
10.0 9.0 8.0
7.0 6.0 Jan Feb Mar Apr May Jun 2009
2010
Jul Aug Sep Oct Nov Dec 2011
2012
Source: Company data
The robust growth has been achieved by spending significant capex to get additional equipment and to improve the existing facilities. The company’s operating cash flow is not sufficient to finance its capex programme. The rights issue last year garnered Rp1.17 tn, and the company recorded a total debt of Rp8.4 tn and cash of Rp1.9 tn as of 31 Dec 2011, with net debt-to-equity of 7x.
High capital requirement hurt balance sheet and earnings
In May 2011, Buma raised US$800 mn bank facility, of which US$750 mn was term-loan and the remaining on a seven year-term and three year-revolver. The loans carry an interest of three months LIBOR + 3.75%, stepping down to 3.25% over time. The proceeds were used to repay US$585 mn SMBC (Sumitomo Mitsui Banking Corporation) syndicated facility, other bank loans, and finance the capital expenditure of around US$80-90 mn. With this new loan, all material restrictive covenants from the previous borrowings have been removed, including the conversion of LBO debt structure to a corporate loan structure. In addition, it extends the tenor and reduces interest expense.
Refinancing—to ease collateral, reduce interest cost, and balance sheet risks
With such significant debts positions, earnings had been hit by high interest expense. The company has been reporting net loss over the past three years. However, we believe this year is the turnaround year for the company following the repayment of the SMBC syndicated loan facilty. If the company is able to grow by 10-12% this year, we expect that they will start reporting profit of Rp104 bn, a recovery from net loss of Rp153 bn in FY11.
2012—the turnaround year, in our view
The company’s monthly operating numbers show increasing activities in coal mining from both, overburden removal and coal production. However, this also suggests an increasing
Increasing coal mining activities
Indonesia Mining Contracting Sector
21
27 September 2012
strip ratio. Fuel cost accounts for around 14% of the total cost or 17% of cash costs. This cost is passed through to the mining companies. Most of the mining companies now buy their own fuel. Some contracts also contain pre-determined cost escalation payments other than fuel. Therefore, mining companies take more risk in operation than mining contracting companies. However, there are some areas such as a longer distance of hauling that cause inefficiency in the utilisation of the equipments which have to be borne by the mining contracting companies. The suppliers of heavy equipment include Komatsu, Catepillar and Hitachi. Figure 42: Overburden removal
Figure 43: Coal production
In mn bcm
In mn tonne
35.0
3.6
33.0
3.4
31.0
3.2
29.0
3.0
27.0
2.8
25.0
2.6
23.0
2.4
21.0
2.2
19.0
2.0
17.0 Jan Feb Mar Apr May Jun 2009
Source: Company data
2010
Jul Aug Sep Oct Nov Dec 2011
Jan Feb Mar Apr May Jun 2009
2012
2010
Jul Aug Sep Oct Nov Dec 2011
2012
Source: Company data
We expect the company to spend capex around US$300 mn this year and US$100 mn p.a. for maintenance, 2013 onwards. Operating cash flow should improve over time, which should be sufficient to pay down loan before the seven-year maturity, in our view.
Indonesia Mining Contracting Sector
22
27 September 2012
NEUTRAL rating with TP of Rp315 Although Delta Dunia is among the five largest mining contracting companies with relatively long-term experience in the sector, we are concerned about the company’s balance sheet condition. Debt is necessary for the company to replace its old equipment and increase efficiency. Despite having a dented debt-to-equity of 7x , the company’s EBITDA should be strong enough to finance the debt and capex requirement, except for 2012 when the company plans to spend US$300 mn. But if the capex is delayed, there will be threat to its future efficiency, considering it is operating inefficient old equipment.
Balance sheet risks—high debt level, but EBITDA sufficient for debt servicing
Figure 44: EBITDA, financing cost and capex Rp bn 3,000 2,500 2,000 1,500 1,000 500 2010
2011 EBITDA
2012E Net financing cost
2013E
2014E
Capex
Source: Company data, Credit Suisse estimates
Our target price of Rp315/share is based on EV/EBITDA target of 4x, which is at a 30% discount to the sector average after considering that the company’s ability for growth and efficiency improvement would depend on its capability to raise finance for replacing and adding new equipment. Figure 45: Summary of valuation In Rp bn Description
Amount
Target EV/EBITDA EBITDA 2013 Enterprise value
4x 2,630 10,521 7,945 2,576 315 26%
Net debt Equity value Target price (Rp bn) Upside Source: Company data, Credit Suisse estimates
Risks
Risks to our valuation
If coal price continues to stay low and there is risk of coal miners to cut production, there is risk on the company’s average rate and volume and operating cash flow. The annual interest for the debt is around Rp520 bn, while EBITDA is estimated around Rp2.6 tn.
Indonesia Mining Contracting Sector
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27 September 2012
Delta Dunia Makmur DOID.JK / DOID IJ Price (25 Sep 12): Rp250.00, Rating:: NEUTRAL [V], Target Price: Rp315.00, Analyst: Ami Tantri Target price scenario Scenario Upside Central Case Downside
TP
Key earnings drivers Overburden removal (mn Coal bcm) getting (mn t) Newcastle coal price (USD/t)
%Up/Dwn Assumptions
315.00
Income statement (Rp bn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (Rp bn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (Rp bn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity
26.00 12/11A 6,821 5,729 422.9 (1,374) 2,043 1,374 669.2 393.3 (316.2) — (40.3) — 113.1 (153.4) — — — (153.4) — (153.4) 12/11A 669.2 — (374.8) (37.4) 635 892 (1,098) (206) — — 31.5 — 110.4 (956) 1,172 — 283.8 (8.5) 1,447 1,383 — 1,383 12/11A 1,932 1,444 489.9 511.3 4,377 5,075 31.2 — 1,319 10,803 1,038 659.7 — 322.0 2,019 7,749 — 95.9 9,864 938.2 0.001 10,803
12/12E 8,362 7,406 452.5 (2,030) 2,534 2,030 503.7 491.6 (738.1) — (725.9) — (181.5) (544.4) — — — (544.4) — (544.4) 12/12E 503.7 — 181.5 (194.8) 842 1,333 (2,800) (1,467) — — — — — (2,800) — — (137.2) — (137) (1,605) — (1,605) 12/12E 327 1,771 633.3 634.3 3,366 5,845 31.2 — 1,277 10,519 1,341 659.7 — 416.3 2,417 7,612 — 95.9 10,125 393.7 0.001 10,519
12/13E 9,265 8,493 479.3 (2,338) 2,630 2,338 292.0 491.1 267.8 — 68.8 — 17.2 51.6 — — — 51.6 — 51.6 12/13E 292.0 — (17.2) (101.9) 2,115 2,288 (939) 1,349 — — — — — (939) — — — — — 1,349 — 1,349 12/13E 1,676 1,962 726.3 710.2 5,075 4,446 31.2 — 1,277 10,829 1,538 659.7 — 477.4 2,675 7,612 — 95.9 10,383 445.4 0.001 10,829
12/14E 10,160 8,885 489.7 (1,778) 2,564 1,778 785.6 457.3 (13.6) — 314.7 — 78.7 236.0 — — — 236.0 — 236.0 12/14E 785.6 — (78.7) (180.0) 1,307 1,834 (935) 899 — — — — — (935) — — — — — 899 — 899 12/14E 2,576 2,152 759.8 760.0 6,247 3,603 31.2 — 1,277 11,158 1,609 659.7 — 499.3 2,768 7,612 — 95.9 10,476 681.4 0.001 11,158
Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rp) DPS (Rp) BVPS (Rp) Operating CFPS (Rp) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)
12/11A 334.0 34.7 123.0 — — 12/11A 7,843 (19.6) — 115 114 12/11A
12/12E 375.1 39.1 98.0 — — 12/12E 8,148 (66.8) — 48 164 12/12E
12/13E 413.8 43.1 100.0 — — 12/13E 8,148 6.3 — 55 281 12/13E
12/14E 448.1 46.7 110.0 — — 12/14E 8,148 29.0 — 84 225 12/14E
17.6 (35) 3 15
22.6 (25) (255) (242)
10.8 (42) 109 109
9.7 169 357 357
30.0 9.8 (0.59) (2.25)
30.3 6.0 (8.68) (6.51)
28.4 3.2 0.74 0.56
25.2 7.7 3.10 2.32
(12.8) 2.17 — 2.20 1.25 4.17 12.7
(3.7) 5.17 — 1.53 1.19 3.94 19.8
39.5 4.57 — 0.89 0.93 3.28 29.6
8.6 2.99 — 1.11 0.76 3.02 9.8
(33.5) 38.2 0.63 (0.06) 3.81 11.5
(81.8) 4.8 0.79 (1.44) 0.75 26.7
12.3 2.8 0.86 0.24 0.75 24.3
41.9 8.8 0.91 0.40 0.75 16.4
690 3.17 1.70
2,018 3.14 1.02
1,481 2.51 0.59
836 2.22 1.72
Source: Company data, Thomson Reuters, Credit Suisse estimates
12MF P/E multiple 18 16
14 12 10
8 6 4 2 0 Sep-09
May-10
Jan-11
Sep-11
May-12
12MF P/B multiple 12 10
8 6 4 2 0 Sep-09
May-10
Jan-11
Sep-11
May-12
Source: IBES
Indonesia Mining Contracting Sector
24
27 September 2012
Asia Pacific / Indonesia
PT Indika Energy Tbk (INDY.JK / INDY IJ) Rating OUTPERFORM* [V] Price (25 Sep 12, Rp) 1,620.00 Target price (Rp) 2,700.00¹ Chg to TP (%) 66.7 Market cap. (Rp mn) 8,440,511 Enterprise value (US$ mn) 1,783 Number of shares (mn) 5,210.19 Free float (%) 36.5 52-week price range 2,950.0 - 1,510.0 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts Ami Tantri 62 21 2553 7976
[email protected] Dian Haryokusumo 62 21 255 37974
[email protected] Contribution by Anindito Widyanarendra
Dian Haryokusumo 62 21 255 37974
[email protected]
Undervalued, but higher exposure on coal
■ Initiate coverage on Indika Energy with OUTPERFORM rating: We intiate coverage on Indika Energy with an OUTPERFORM rating and target price of Rp2,700. Indika is one of our top picks in the sector as the earnings are strongly supported by coal mining by Kideco, one of the best coal mining companies in Indonesia with a prudent management. ■ Coal mining: Largest contributor to earnings—Indika owns 46% of Kideco, the fourth-largest coal mining company in Indonesia, producing highgrade coal with efficient operation and a strong balance sheet. Kideco is the largest contributor to Indika’s earnings. Petrosea is a mining contracting subsidiary, which also has a 50% stake in Santan Batubara, a small highgrade coal producer. ■ Catalysts: The earnings momentum tends to be negative with a decline in coal price in 3Q12. However, we believe this has been priced in, with share price falling 36% YTD relative to the JCI. The large contribution from coal mining makes the stock a high-beta one in the mining contracting universe. ■ Looks undervalued: Our target price of Rp2,700 is based on sum of parts valuation with EV/EBITDA target for mining contracting and services of 6x, and P/E target of 6x for coal mining, which is at a 30% discount to the sector average to reflect the holding company’s discount. Despite that, the stock looks undervalued. Key risks to our rating and valuation are lower-thanexpected overburden removal, lower-than-expected upcoming contracts, lower coal price and production, and high oil price.
Share price performance 6000
Price (LHS)
Rebased Rel (RHS)
4000 2000 0 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12
200 150 100 50 0
The price relative chart measures performance against the JSX COMPOSITE INDEX which closed at 4226.89 on 25/09/12 On 25/09/12 the spot exchange rate was Rp9570./US$1
Performance Over Absolute (%) Relative (%)
1M 1.3 -0.7
3M -12.9 -20.3
12M -29.6 -57.0
Financial and valuation metrics Year Revenue (US$ mn) EBITDA (US$ mn) EBIT (US$ mn) Net profit (US$ mn) EPS (CS adj.) (US$) Change from previous EPS (%) Consensus EPS (US$) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/11A 592.1 277.6 236.8 126.2 0.02 n.a. n.a. 48.3 7.0 4.0 5.2 1.2 19.4 65.5
12/12E 764.6 341.6 244.2 135.2 0.03
12/13E 970.8 401.2 289.8 158.7 0.03
12/14E 1,160.3 508.4 383.0 235.2 0.05
0.03 7.0 6.5 7.4 5.2 1.0 16.8 84.0
0.02 17.4 5.6 9.0 4.1 0.9 16.9 61.8
0.03 48.2 3.8 13.3 2.7 0.8 22.1 36.1
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Indonesia Mining Contracting Sector
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27 September 2012
Focus charts and table Figure 46: Share price performance
Figure 47: Gross profit contributors FY12
%
% US$/t 150 140 130 120 110 100 90 80 70 60
R= 0.78
250% 200% R= - 0.58 150% 100% 50% 0% -50% -100% -150% -200%
R= 0.81
Coal sales 1%
Jul-12
Apr-12
Coal Price (RHS)
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Oct-09
Jul-09
Apr-09
Jan-09
INDY rel perf to JCI
Kideco * 65%
MBSS 20%
Petrosea 8% Tripatra 4%
Long Term R = 0.5
Santan Batubara * 2%
Source: Company data, Credit Suisse estimates
*Kideco+Santan–equity accounting; Source: Credit Suisse estimates
Figure 48: Petrosea’s overburden removal
Figure 49: Petrosea’s coal production
In mn bcm
In mn tonne
200
12
180 10
160 140
8
120 100
6
80 4
60
40
2
20
0
0 2008
2009
2010
2011
2012E
2013E
2014E
2008
2009
2010
2011
2012E
Source: Company data, Credit Suisse estimates
Source: Company data, Credit Suisse estimates
Figure 50: Petrosea’s mining fee vs costs
Figure 51: Santan and Kideco
US$/bcm
In mn tonne
2013E
2014E
40
3.0
35
2.5
30 2.0 25 1.5
20 15
1.0
10
0.5
5 0.0
2009
2010
2011
2012E
2013E
2014E
0 2005
Fuel cost
Cash COGS
Cash G&A
Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
Mining fee
2006
2007
2008 Kideco
2009
2010
2011 2012E 2013E 2014E
Santan Batubara
Source: Company data, Credit Suisse estimates
26
27 September 2012
More coal exposure Engineering services and mining contracting Indika’s main operation is the engineering arm under Tripatra, a wholly owned subsidiary established in 1973. Tripatra is the leading EPC and O&M services company in Indonesia. As an engineering company, Tripatra focuses on the energy, oil/gas and coal sectors, with long-term relationship with major oil companies such as ExxonMobill, Chevron, and Hess. Tripatra has three subsidiaries and affiliates: ■ Kuala Pelabuhan Indonesia: Tripatra owns 100% equity interest in the company. KPI provides services covering marine operations, road and transportation, construction and maintenance. ■ PT Cotrans Asia: Tripatra owns a 45% stake in the company. Cotrans provides offshore coal transportation and transhipment in the Adang Bay. It has 21 units of tug boats and 23 barges. ■ PT Sea Bridge shipping: Tripatra owns a 46% equity in the company, which provides domestic coal transhipment for Kideco. It owns two units of floating facilities. The mining contracting is conducted by Petrosea (PTRO.JK), which contributes 52% of Indika’s revenue. We discuss about Petrosea later in this report.
Adding coal assets Acquisition of MTU In May 2012, Indika finished the acquisition of an 85% stake in Multi Tambangjaya Utama (MTU) from Asia Thai Mining Co. Ltd, a coal mining company in Kalimantan, and its coal rights from International Coal Trading Ltd. The total consideration (at 100% basis) is US$205 mn, including liabilties and rights. MTU’s mining area is over 25,000 Ha in Central Kalimantan. It holds third-generation CCOW since 1997 with production commencing in 2008. The quality is of high-grade with calorific value around 6,500-7,200 kcal/kg (ADB), and there is also coking coal reserves of CV around 7,800 kcal/kg (ADB). The facilities are capable of producing and transporting around 3-5 Mtpa of coal. Production was stopped due to some issues with the local community. Indika is very confident of handling these issues well, being a local company. Figure 52: Reserves and resources estimates In mn tonne Reserves Resources Strip ratio
Thermal
Coking
Total
31.2 51.6 13.0
9.4 23.6 17.0
40.6 75.2
Source: Company data, USGS standard
To acquire a greenfield coal asset PT Mitra Energi Agung (MEA) has mining area in East Kalimantan. Indika signed a sales purchase agreement on 21 March 2012 to acquire a 60% stake in MEA from Pacific Emperor Holdings Ltd. for US$27 mn. MEA holds an IUP license with concession covering 5,000 Ha. The area has low-grade coal with calorific value of around 3,750-4,000 kcal/kg GAR. The pit is close to the port with an 18 km hauling road, while the transhipment port is around 50 km away. The initial drilling indicated around 40 mn tonne of reserves and 100 mn tonne of resources with strip ratio of 3-4x.
Indonesia Mining Contracting Sector
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27 September 2012
Kideco: Cash flow contributor Indika owns a 46% stake in PT Kideco Jaya Agung (Kideco), the third largest coal producer in Indonesia which has operations over an average 50,400 Ha in South Kalimantan. Kideco holds the first-generation of CCOW. The JORC estimates reserves of 651 mn tonne and resources of 1,376 mn tonne as of April 2011. Other shareholders are Samtan with a 49% stake and PT Muji Inti Utama that holds the remaining 5%. Figure 53: Reserves and resources JORC estimates In mn tonne Reserves Probable
Total
Measured
Indicated
Inferred
Total
91
157 18 39 16 421
106
79
66 18 17 16 342
88
114 22 33 21 570
44 57 62 7 225
264 79 122 28 883
192
459
651
221
760
395
1,376
Roto South Roto North Roto middle Susubang Samarangau
22
Total
Resources
Proved
27
Source: Company data
Kideco has been able to grow its production with a 10% CAGR over the past six years reaching 31.6 mn tonne in 2011. The calorific value of coal is between 4,430 kcal/kg and 5,470 kcal/kg; Kideco’s average selling price is at around 40% discount to the benchmark price. Figure 54: Coal output
Figure 55: Coal price and ASP
In mn tonne
US$/t
40
140
35
120
30
100
25
80
20
60
15
40
10
20
5
0 2005
0 2005
2006
2007
2008
2009
2010
2011 2012E 2013E 2014E
Source: Company data, Credit Suisse estimates
2006
2007
2008
2009
ASP
2010
2011 2012E 2013E 2014E
Coal price
Source: Company data, Bloomberg, Credit Suisse estimates
Kideco has one of the most efficient coal mining operations. Production has not been much affected by weather given they have built all-weather roads for the mining area and connecting the ports. Kideco is Indika’s largest earnings contributor which has been paying dividend at a minimum 80% DPR. Kideco has been paying dividend between 88-98% of its profit since 2006.
Indonesia Mining Contracting Sector
28
27 September 2012
Figure 56: ASP vs cash cost
Figure 57: Markets in 2011
US$/t
Thailand Others 6% 3% Philippines 7%
90 80 70
HK 4%
60
Indonesia 23%
50
Malaysia 8%
40 30
Korea 15%
India 8%
20
10
China 15%
0 2005
2006
2007
2008
2009
ASP
2010
2011 2012E 2013E 2014E
Japan Taiwan 6% 5%
Cash cost
Source: Company data, Credit Suisse estimates
Source: Company data
Petrosea: An expert in coal mining Indika owned 69.8% of Petrosea (PTRO.JK) after the placement in February 2012; the company sold 28.75% of Petrosea at Rp36,000/share or US$116 mn. In 2009, Indika had bought 98.5% of Petrosea for US$120 mn. Consequently, this placement of Petrosea would add around US$81 mn in profit. Petrosea is originally an engineering company which has transformed to mining contracting business, primarily coal, and was first listed at JSX on 21 May 1990. Mining contracting accounts for 87% of total revenue, up from 49% from three years ago. They have 29 fleets with capability to move 148 mn bcm of earth per annum. The growth in mining contracting has been very strong as a result of strong demand for coal. The company recorded a 30% CAGR in three years. By adding five fleets per annum with total capital expenditure of around US$60 mn, the company is looking to expand its mining contracting business.
From an engineering company to mining contracting
Petrosea serves major coal mining companies including Bayan, Kideco, its sister-company under Indika (INDY.JK), Santan Batubara, which Petrosea owns a 50% stake in; and ABN, the subsidiary of Toba Bara (TOBA.JK, not rated). Bayan is the largest customer. The company is re-negotiating contracts with ABN due to the recent underperformance. However, this is likely to be offset by the new contracts from Indika for Kideco and MTU for next year. The company expects to get around 180-200 mn bcm of overburden for 2013, with a cut from 175-180 mn bcm to 160 mn bcm this year.
Santan Batubara Santan Batubara (SB) is 50% owned by Petrosea, with the remaining 50% owned by Harum Energy (HRUM.JK). SB’s mine area is located in East Kalimantan with estimated reserves of 17.3 mn tonne and resources of 61.5 mn tonne on JORC resources, while non-JORC estimates reserves of 30.6 mn tonne and resources of 222.2 mn tonne as of March 2011. The quality of the coal is medium-grade to high-grade with calorific value of around 5,500 kcal/kg (GAR). The first half production of Santan Batubara indicates that the 3 mn tonne target is unlikely to be achieved due to some mining plan changes. Therefore, we have cut our FY12 output target to 2 mn tonne. There was some delay in mining activities due to delays in delivery of equipment at Petrosea. The partner, Harum Energy (HRUM.JK) has hired a local contractor to start the work, however, we expect that production will be moved forward to
Indonesia Mining Contracting Sector
29
27 September 2012
the next year. Operation in SB should nonetheless be back on track, and so, the volume target of 3.5 mn tonne could be achieved next year. Figure 58: Coal production and ASP
Figure 59: ASP vs cash cost
In million tonnes
US$/tonne
4.5
110
120
4.0
100
100
3.5
90
3.0
80
2.5
80 70
60
2.0 1.5
60
40
50
1.0
20
0.5 -
40
2009
2010
2011
Santan output
2012E
2013E
30
2014E
2009
2010
2011
ASP-RHS (US$/t)
ASP-RHS (US$/t)
Source: Company data, Credit Suisse estimates
2012E
2013E
2014E
Cash cost
Source: Company data, Credit Suisse estimates
Mitra Bahtera Segara Sejati (MBSS): The barge company MBSS was incorporated in 1994 and Indika owns a 51% stake. The second largest shareholder is PT Patin Resources with a 36.5% stake and the rest are held by public shareholders. The company is an integrated coal transport and logistic service player. Its customers are primarily major coal mining companies such as Adaro, KPC, Bukit Asam, Berau Coal and Kideco. Around 95% of the revenue is tied to long-term contracts based on time charter, freight rate and fixed and variable rate, with contract life between one and five years for coal barging and two and five years for floating crane/transhipment services. Figure 60: MBSS barging and transhipment In mn tonne
35 30 25 20 15 10 5 0 2008
2009
2010
2011
Barging volume
2012E
2013E
2014E
Transhipment
Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
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27 September 2012
Cirebon power plant project Indika owns a 20% stake in Cirebon Electric Power project in West Java. This is a 660MW coal-fired power plant project which is 98.61% completed, a slight delay from the original schedule. The project cost around US$850 mn financed by 70/30 debt-to-equity. A loan of US$595 mn came from Japan Bank for International Cooperation (JBIC) and The Export Import Bank of Korea (KEXIM) and four other banks. Indika injected around US$52.5 mn for its 20% stake in January 2010. Cirebon has a 30-year power purchase agreement with PLN at a price of US$0.0443/kwh, and the coal cost is passed through to PLN. The plant consumes around 2.4 mn tonne of coal per annum with calorific value of 4,500 kcal/kg.
Indonesia Mining Contracting Sector
31
27 September 2012
OUTPERFORM, TP of Rp2,700 We have valued Indika’s services business which includes Tripatra, Petrosea’s mining contracting and transporation, using an EV/EBITDA target of 6x for 2013. For the coal business, which includes Kideco, Santan Batubara and the newly acquired MTU, we assume a 30% holding company discount to the sector average P/E target of 9x for 2013 based on a benchmark coal price of US$100/t. We estimate an equity value of US$1.4 bn, or Rp2,700/share. This provides a 67% upside to the share price. Indika’s share price has been hit by the decline in coal price and disappointments with regard to the projects. Figure 61: Summary of valuation US$ mn Description
Amount
Target EV/EBITDA - contracting (Tripatra, Petrosea + others) - x EBITDA 2013 EV for services
6 150
Target P/E for coal (Kideco, SB, MTU) -X Earning for coal 2013 Equity value
6 231
901
1,456
Sub total Net debt Minority interest
2,356 628 224
Equity value
1,504
Equity value in Rpbn Target price in Rp/share
14,290 2,700
Source: Company data, Credit Suisse estimates
We have run a sensitivity analysis to our earnings forecasts and valuation on different coal price assumptions. Figure 62: Sensitivity analysis to coal price INDY.JK
ASP (US$/t)
Net Income
EPS (US$)
Up/Down from base
P/E (x)
DPS (US$)
Div Yield
80.6 73.3 65.9 58.6
215.2 158.7 102.6 46.6
0.041 0.030 0.020 0.009
36% 0% -35% -71%
4.3 5.9 9.1 20.0
0.02 0.02 0.01 0.00
12% 9% 6% 3%
FY13E US$110 US$ 100 - Base case US$ 90 US$ 80
Source: Company data, Credit Suisse estimates
Risks Key risks to our rating and valuation are lower-than-expected overburden removal, lowerthan-expected upcoming contracts, lower coal price and production, and high oil price.
Indonesia Mining Contracting Sector
32
27 September 2012
PT Indika Energy Tbk INDY.JK / INDY IJ Price (25 Sep 12): Rp1,620.00, Rating:: NEUTRAL [V], Target Price: Rp2,700.00, Analyst: Ami Tantri Target price scenario Scenario Upside Central Case
TP
%Up/Dwn Assumptions
2,700.0 0
Downside Income statement (US$ bn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (US$ bn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (US$ bn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity
66.67 12/11A 0.6 0.46 0.11 (0.04) 0.28 0.04 0.24 0.07 (0.01) 0.22 0.15 — 0.02 0.14 — 0.01 — 0.13 — 0.13 12/11A 0.02 (0.05) (0.02) (0.03) 0.08 0.01 (0.15) (0.14) — — (0.06) — 0.13 (0.09) — (0.02) 0.24 (0.0009) 0.22 0.14 — 0.14 12/11A 0.38 0.14 0.01 0.17 0.70 0.59 0.36 0.21 0.16 2.0 0.10 0.33 — 0.06 0.49 0.61 — 0.05 1.2 0.7 0.15 2.0
12/12E 0.8 0.61 0.12 (0.10) 0.34 0.10 0.24 0.05 (0.01) 0.21 0.19 — 0.02 0.17 0.08 0.03 — 0.22 (0.08) 0.14 12/12E 0.03 (0.05) (0.02) 0.01 0.10 0.06 (0.23) (0.16) — — (0.34) — 0.20 (0.37) — (0.04) 0.11 — 0.07 (0.23) — (0.23) 12/12E 0.15 0.18 0.01 0.17 0.51 0.72 0.79 0.21 0.16 2.4 0.13 0.50 — 0.08 0.71 0.55 — 0.05 1.3 0.9 0.18 2.4
12/13E 1.0 0.77 0.13 (0.11) 0.40 0.11 0.29 0.06 (0.01) 0.22 0.23 — 0.02 0.20 — 0.05 — 0.16 — 0.16 12/13E 0.07 (0.06) (0.02) 0.00 0.11 0.10 (0.09) 0.01 — — — — 0.20 0.12 — (0.06) (0.06) — (0.13) 0.09 — 0.09 12/13E 0.23 0.23 0.02 0.17 0.65 0.69 0.81 0.20 0.16 2.5 0.17 0.43 — 0.10 0.71 0.55 — 0.05 1.3 1.0 0.22 2.5
12/14E 1.2 0.91 0.15 (0.13) 0.51 0.13 0.38 0.05 (0.01) 0.28 0.33 — 0.03 0.29 — 0.06 — 0.24 — 0.24 12/14E 0.10 (0.05) (0.03) 0.00 0.13 0.15 (0.09) 0.06 — — — — 0.26 0.17 — (0.08) (0.06) — (0.14) 0.17 — 0.17 12/14E 0.41 0.27 0.02 0.17 0.87 0.65 0.84 0.19 0.16 2.7 0.20 0.37 — 0.12 0.69 0.55 — 0.05 1.3 1.1 0.28 2.7
Key earnings drivers Overburden Removal Kideco Volumeproduction (mn bcm) volume (mn t) Newcastle coal price (USD/t)
12/11A 116.1 31.6 123.0 — —
12/12E 151.8 34.1 98.0 — —
12/13E 179.1 35.0 100.0 — —
12/14E 202.1 35.0 110.0 — —
Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (US$)(US$) DPS BVPS (US$) Operating CFPS (US$) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)
12/11A 5,208 0.02 0.01 0.14 0.00 12/11A
12/12E 5,210 0.03 0.01 0.17 0.01 12/12E
12/13E 5,210 0.03 0.02 0.19 0.02 12/13E
12/14E 5,210 0.05 0.02 0.22 0.03 12/14E
42.7 48.6 48.3 48.3
29.1 3.1 7.1 7.0
27.0 18.7 17.4 17.4
19.5 32.2 48.2 48.2
46.9 40.0 25.8 21.3
44.7 31.9 24.3 17.7
41.3 29.9 23.5 16.4
43.8 33.0 28.4 20.3
6.98 1.24 4.0 69.1 2.44 5.21 6.11
6.52 0.99 7.4 13.6 2.33 5.22 7.30
5.56 0.89 9.0 8.8 1.68 4.07 5.63
3.75 0.77 13.3 6.1 1.20 2.75 3.65
19.4 18.3 0.29 0.64 0.89 2.35
16.8 12.9 0.32 0.76 0.89 2.23
16.9 13.2 0.39 0.79 0.89 2.08
22.1 17.6 0.43 0.86 0.89 1.91
65.5 2.03 3.17
84.0 2.64 4.62
61.8 1.87 5.16
36.1 1.01 8.05
Source: Company data, Thomson Reuters, Credit Suisse estimates 12MF P/E multiple 16 14 12
10 8 6 4
2 0 2008
2009
2010
2011
2012
2011
2012
12MF P/B multiple 4.0 3.5
3.0 2.5 2.0
1.5 1.0 0.5 0.0 2008
2009
2010
Source: IBES
Indonesia Mining Contracting Sector
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27 September 2012
Asia Pacific / Indonesia Industrial Machinery
United Tractors (UNTR.JK / UNTR IJ) Rating OUTPERFORM* Price (25 Sep 12, Rp) 21,350 Target price (Rp) 28,000¹ Upside/downside (%) 31.1 Mkt cap (Rp bn) 79,638.4 (US$ 8.3) Enterprise value (Rp bn) 78,693 Number of shares (mn) 3,730.14 Free float (%) 44.8 52-week price range 33,000.0 - 19,250.0 ADTO - 6M (US$ mn) 17.0 *Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months.
Research Analysts Dian Haryokusumo 62 21 255 37974
[email protected] Ami Tantri 62 21 2553 7976
[email protected]
Back to fundamentals ■ Maintain OUTPERFORM. We retain our OUTPERFORM rating on United Tractors with Rp28,000 target price, as we believe the share price has reflected the downside risks of lower heavy equipment sales and mining contracting volumes. Despite the short-term slowdown, we expect to see growth considering that UNTR’s clients are mostly low-cost coal producers. ■ Benefiting from the growing coal industry. Indonesian coal companies are amongst the lowest-cost producers, and Indonesia is the largest contributor to seaborne coal. With demand for coal remaining strong, we expect to see Indonesia coal output continuing to grow, although there may be some slowdown in the short term. Being the largest mining contracting company and heavy equipment supplier, we believe that United Tractors is well-placed to take the growth opportunity. ■ Downside risks priced in. The share price of UNTR has underperformed over the past five months on the back of the global economic slowdown, in our view, worsened by the coal oversupply condition. Our analysis shows that the share price performance had little correlation with coal price movement in the past, even during the decline in coal price during the economic crisis in 2008. ■ SOTP target price at Rp28,000. Our target price of Rp28,000 implies a 6.5x FY13E EV/EBITDA and 15x FY13E P/E, versus UNTR’s historical peak of 21.3x P/E. Key risks to our rating and valuation are lower-than-expected overburden removals and lower commodity prices, primarily the coal price.
Share price performance Price (LHS)
Rebased Rel (RHS)
40000 30000 20000 10000 0 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12
140 120 100 80
The price relative chart measures performance against the JSX COMPOSITE INDEX which closed at 4226.89 on 25/09/12 On 25/09/12 the spot exchange rate was Rp9570./US$1
Performance Over Absolute (%) Relative (%)
1M -0.2 -2.2
3M -2.5 -9.9
12M 8.4 -19.1
Financial and valuation metrics Year Revenue (Rp bn) EBITDA (Rp bn) EBIT (Rp bn) Net profit (Rp bn) EPS (CS adj.) (Rp) Change from previous EPS (%) Consensus EPS (Rp) EPS growth (%) P/E (x) Dividend yield (%) EV/EBITDA (x) P/B (x) ROE (%) Net debt/equity (%)
12/11A 55,052.6 11,041.0 7,615.1 5,900.9 1,656.58 n.a. n.a. 42.3 12.9 2.2 6.9 2.9 27.8 net cash
12/12E 58,093.2 12,405.6 7,133.6 5,405.1 1,449.03 0 1,614 -12.5 14.7 3.2 6.3 2.7 19.5 net cash
12/13E 68,532.2 16,160.1 9,077.8 6,913.2 1,853.35 0 1,882 27.9 11.5 3.0 4.8 2.4 21.9 net cash
12/14E 82,265.3 19,793.1 10,760.9 8,088.1 2,168.31 0 2,154 17.0 9.8 3.8 3.9 2.0 22.2 net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates
Indonesia Mining Contracting Sector
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27 September 2012
Focus charts and tables Figure 63: Correlation of share price and coal price
Figure 64: UNTR lead mining contracting business
Rp
As % total revenue US$/t
R= 0.63
R= 0.22 35,000
200 R= 0.87
30,000
180
25,000
160
20,000
140
15,000
120
10,000
100
5,000
80
R= - 0.62
0
60
45%
35%
30% 25% 20%
16% 9%
10%
6%
5%
5%
4%
3%
0%
UNTR
Long Term R = 0.20
Coal Price (RHS)
15%
15%
Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08 UNTR price
42%
40%
DOID
Thiess Leighton
SIS
INDY Dharma Others Henwa
Source: Bloomberg
Source: Company data
Figure 65: Indonesia coal output continues to go up
Figure 66: … along with increase of overburden
mn tonne
mn bcm
500
4,000
450
3,500
400
3,000
350
2,500
300 250
2,000
200
1,500
150
1,000
100
500
50
-
2007
2008
2009
2010
2011
2012E
2013E
2014E
2009
2010
2011
2012E
2013E
Source: MEMR, Credit Suisse estimates
Source: Credit Suisse estimates
Figure 67: UNTR heavy equipment sales
Figure 68: Mining contracting overburden
units
2014E
mn bcm
900
80
800
75
700
70
65
600
60 500 55 400
50
300
Nov-12
Sep-12
Jul-12
May-12
Mar-12
Jan-12
Nov-11
Sep-11
Jul-11
May-11
Mar-11
Jan-11
Nov-10
Sep-10
Jul-10
May-10
Mar-10
Indonesia Mining Contracting Sector
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
Mar-11
Dec-10
Sep-10
Jun-10
Mar-10
Source: Company data, Credit Suisse estimates, Bloomberg
45
Source: Company data, Credit Suisse estimates, Bloomberg
35
27 September 2012
Back to fundamentals We have seen a decline in heavy equipment sales and a soft performance of the mining contracting business as coal mining companies tend to lower their strip ratio during a low coal price environment. However, we have not heard of any major coal mining companies re-negotiating contracts with their mining contracting companies. With a 25% decline in share price relative to JCI YTD, we believe the concerns have been priced in. We see that the downside risk is limited from the current level. Our analysis shows that United Tractors’ share price has had a long-term correlation of 0.2 with coal price movements. Over the past five months, the correlation has however been high at 0.8. Even during the economic crisis in 2008, when coal price fell from US$190 to US$60 in seven months, the correlation was only 0.22. With coal price likely to stay at the current level (US$90/t) for some time, considering the oversupply situation, it is time to look at the fundamentals. Indonesia is the largest contributor to the seaborne coal market with around 40% share. Indonesian coal mining companies are among the lowest-cost coal producers. We expect coal output from Indonesia to continue to grow by around 7% p.a. Figure 69: Correlation of share price performance and
Figure 70: Correlation of relative performance and coal
coal price
price
Rp US$/t
R= 0.63
R= 0.22 35,000
200 R= 0.87
30,000
180
25,000
160
20,000
140
15,000
120
10,000
100
5,000
80
R= - 0.62
0
60
Coal Price (RHS)
Source: Bloomberg
Long Term R = 0.20
200 180
R= 0.84
150%
US$/t
160 100%
140
50%
120
100 0%
80
-50%
60
Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08
Jul-12 Apr-12 Jan-12 Oct-11 Jul-11 Apr-11 Jan-11 Oct-10 Jul-10 Apr-10 Jan-10 Oct-09 Jul-09 Apr-09 Jan-09 Oct-08 Jul-08 Apr-08 Jan-08 UNTR price
200%
R= - 0.65
R= 0.02
UNTR rel perf to JCI
Coal Price (RHS)
Long Term R = 0.15
Source: Bloomberg
Heavy equipment The decline in heavy equipment sales was primarily due to mining companies cutting down their capital expenditure programmes. Although United Tractors still showed strong heavy equipment sales up to May 12, we saw the slowdown start to take effect in June 12 with heavy equipment sales volume declining by 35% MoM and 32% YoY. As expected, UNTR’s August heavy equipment sales volume continued to soften by 32% YoY (-flat MoM) to 402 units, partly also due to tight competition arising from the impact of oversupply of Chinese machineries for the 20 tonne excavator type, which is normally used for non-mining. This brings 8M12 sales volume down 11% YoY to 5,035 units. The company’s official target for heavy equipment sales still hovers around 8,500 units, although it believes that it is challenging. Our full-year estimate of 7,652 units assumes an average of around 650 units for the remaining four months. Mining companies have cut capex programmes, primarily on heavy equipment. However, they will need to replace their equipments sooner or later. We also expect coal production
Indonesia Mining Contracting Sector
36
27 September 2012
to continue to grow in Indonesia. Consequently, we still expect to see growth in terms of heavy equipment demand from the current low levels. Mining contracting Pama’s August coal production volume dropped 4% MoM (flat YoY), while overburden rose 3% MoM (down 2% YoY). YTD coal production and overburden volumes rose 7-8% YoY with a stripping ratio at 9.2x. We expect 5% YoY growth for this year’s coal production and overburden from UNTR’s mining contracting division, which implies coal production with monthly average of 7.8 mn tonnes, and 69.9 mn bcm of average monthly overburden for the next four months. Figure 71: Pama customer’s overburden Overburden by customers
Total company
Done by PAMA
% of overburden done by PAMA
in mn bcm
2009
2010
2011
2009
2010
2011
2009
2010
2011
Adaro Indominco KPC Kideco Jembayan Trubaindo Others Total
193 182 442 158 82 61 n.a. n.a.
239 217 413 170 99 75 n.a n.a.
281 178 472 220 96 83 n.a n.a.
84 144 79 80 70 45 96 598
91 139 97 80 87 50 107 652
124 160 113 95 84 64 155 796
43% 79% 18% 51% 85% 75% n.a. n.a.
38% 64% 23% 47% 88% 67% n.a. n.a.
44% 90% 24% 43% 88% 77% n.a. n.a.
Source: Company data
Mining UNTR’s coal sales volume in August rose 27% MoM and 73% YoY, causing 8M12 volumes to rise 42% YoY to 4.1 mn tonnes . We expect this year’s coal sales volume at 6.2 mn tonne, in line with the company’s guidance. The company, through its subsidiary Tuah Turangga Agung (TTA), has completed acquisition of 100% shares in Borneo Berkat Makmur (BBM), which currently owns 60% shares of Piranti Jaya Utama (PJU). The acquisition is estimated at around US$51 mn, to be part-financed through internal cash and the remaining from the proceeds from the rights issue last year. PJU owns 4,800 Ha green field concession in Kapuas, Central Kalimantan. The coal reserve is estimated to reach around 44-48 mn tonnes with 5,400 Kcal of expected production in 2014.
Indonesia Mining Contracting Sector
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27 September 2012
OUTPERFORM with TP Rp28,000 United Tractors is our top pick in the sector as it is the largest mining contracting company in Indonesia and a leading player in the heavy equipment business. We believe the stock has priced in the downside risks on heavy equipment sales and short-term slowdown in mining contracting. However, we still expect coal output to continue growing in Indonesia, given the low cost and being the largest supplier of seaborne coal. Considering that, we believe the company is well-placed to grow. Our Rp28,000 target price is based on sum of the parts of UNTR’s business based on EV/EBITDA targets for 2013 of 7.5x for construction machinery, 6x for mining contracting and 5.5x for coal mining operations. At Rp28,000, the stock implies 6.5x FY13E EV/EBITDA, and 15x FY13E P/E versus UNTR's historical peak of 21.3x P/E. Figure 72: UNTR sum of the parts valuation EV/EBITDA X
13E EBITDA Rp bn
EV Rp bn
7.5 6.0 5.5
5,284 9,584 1,292
39,632 57,506 7,103 104,241 (968) 329 1,522 104,016 3730 28,000
Construction machinery Mining contracting Coal Mining Total EV Net Debt/(Cash) Associate value Minority interests Equity Value No of shares Calculated TP Source: Company data, Credit Suisse estimates
Indonesia Mining Contracting Sector
38
27 September 2012
United Tractors UNTR.JK / UNTR IJ Price (25 Sep 12): Rp21,350, Rating:: OUTPERFORM, Target Price: Rp28,000, Analyst: Dian Haryokusumo Target price scenario Scenario
TP 42,200. Upside 00 28,000. Central Case 00 20,671. Downside 00 Income statement (Rp bn) Sales revenue Cost of goods sold SG&A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Non-operating inc./(exp.) Associates/JV Recurring PBT Exceptionals/extraordinaries Taxes Profit after tax Other after tax income Minority interests Preferred dividends Reported net profit Analyst adjustments Net profit (Credit Suisse) Cash flow (Rp bn) EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Disposals of fixed assets Acquisitions Divestments Associate investments Other investment/(outflows) Investing cash flow Equity raised Dividends paid Net borrowings Other financing cash flow Financing cash flow Total cash flow Adjustments Net change in cash Balance sheet (Rp bn) Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Investments Intangibles Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities Long-term debt Non-current provisions Other non-current liab. Total liabilities Shareholders' equity Minority interests Total liabilities & equity
%Up/Dwn Assumptions 97.66 31.15
Key earnings drivers Construction machinery Coal production volume (units) volume (mn tonnes) (bcm) Overburden Coal sales volume (mn tonnes)
12/11A 8,467 86.7 792 3.45 —
12/12E 7,652 91.0 831 3.62 —
12/13E 8,614 101.0 923 3.80 —
12/14E 10,237 116.2 1,061 3.99 —
Per share data Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rp) DPS (Rp) BVPS (Rp) Operating CFPS (Rp) Key ratios and valuation Growth(%) Sales revenue EBIT Net profit EPS Margins (%) EBITDA EBIT Pre-tax profit Net profit Valuation metrics (x) P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT ROE analysis (%) ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Credit ratios Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)
12/11A 3,562 1,657 476 7,389 2,931 12/11A
12/12E 3,730 1,449 693 7,823 2,807 12/12E
12/13E 3,730 1,853 635 9,073 3,406 12/13E
12/14E 3,730 2,168 812 10,459 4,221 12/14E
47.5 47.5 52.4 42.3
5.5 (6.3) (8.4) (12.5)
18.0 27.3 27.9 27.9
20.0 18.5 17.0 17.0
20.1 13.8 14.1 10.7
21.4 12.3 12.3 9.3
23.6 13.2 13.3 10.1
24.1 13.1 13.0 9.8
12.9 2.89 2.23 7.28 1.39 6.94 10.1
14.7 2.73 3.25 7.61 1.35 6.34 11.0
11.5 2.35 2.97 6.27 1.14 4.82 8.6
9.8 2.04 3.80 5.06 0.94 3.89 7.2
27.8 26.1 1.19 1.02 0.76 1.69
19.5 20.0 1.15 1.00 0.76 1.66
21.9 21.8 1.16 1.00 0.76 1.67
22.2 22.7 1.18 0.99 0.76 1.70
(11.0) (0.27) 196
(3.1) (0.08) 427
(4.8) (0.10) (962)
(6.4) (0.13) 83
(3.18) 12/11A 55,053 44,859 2,578 (3,426) 11,041 3,426 7,615 38.8 208.3 — 7,785 — 1,885 5,900 — (1.4) — 5,901 — 5,901 12/11A 7,615 — (1,885) 1,104 3,606 10,440 (5,648) 4,792 — — — — (2,017) (7,665) — (1,697) — 4,530 2,832 5,608 184.4 5,792 12/11A 7,135 9,833 7,129 1,528 25,626 13,670 616.0 — 6,528 46,440 10,303 1,843 — 2,783 14,930 1,835 — 2,171 18,936 26,320 1,183 46,440
12/12E 58,093 48,009 2,950 (5,272) 12,406 5,272 7,134 16.7 13.6 — 7,130 — 1,727 5,404 — (1.3) — 5,405 — 5,405 12/12E 7,134 — (1,727) (225) 5,287 10,469 (9,949) 520 — — — — (131) (10,080) — (2,586) — 200 (2,386) (1,997) — (1,997) 12/12E 5,139 10,376 7,630 1,647 24,791 18,340 650.1 — 6,889 50,671 11,027 1,382 — 3,031 15,440 2,321 — 2,415 20,177 29,182 1,312 50,671
12/13E 68,532 56,014 3,441 (7,082) 16,160 7,082 9,078 (9.4) 32.9 — 9,120 — 2,208 6,912 — (1.6) — 6,913 — 6,913 12/13E 9,078 — (2,208) (1,283) 7,117 12,703 (9,232) 3,471 — — — — (1,020) (10,252) — (2,369) — 1,353 (1,016) 1,436 — 1,436 12/13E 6,574 12,240 8,902 2,013 29,730 20,484 766.9 — 8,127 59,107 12,866 1,780 — 3,476 18,121 2,611 — 3,011 23,743 33,842 1,522 59,107
12/14E 82,265 67,660 3,844 (9,032) 19,793 9,032 10,761 129.9 38.9 — 10,670 — 2,584 8,086 — (1.9) — 8,088 — 8,088 12/14E 10,761 — (2,584) (1,506) 9,073 15,744 (10,949) 4,795 — — — — (1,519) (12,468) — (3,030) — 1,705 (1,325) 1,951 — 1,951 12/14E 8,525 14,693 10,753 2,434 36,406 22,394 920.5 — 9,755 69,475 15,541 2,260 — 4,254 22,054 3,021 — 3,633 28,708 39,013 1,754 69,475
Source: Company data, Thomson Reuters, Credit Suisse estimates. 12MF P/E multiple 30 25 20 15 10 5 0 2007
2008
2009
2010
2011
2012
2011
2012
12MF P/B multiple 7 6 5 4 3 2 1 0 2007
2008
2009
2010
Source: IBES
Indonesia Mining Contracting Sector
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Companies Mentioned (Price as of 25 Sep 12) ABM Investama (ABMM.JK, Rp3,550.00, NEUTRAL, TP Rp3,800) Anglo American plc (AAL.L, 1888p, NEUTRAL, TP 2,200.00p) BHP Billiton Ltd. (BHP.AX, A$33.25, NEUTRAL, TP A$35.00) Caterpillar, Inc. (CAT, $87.01, OUTPERFORM, TP $117.00) China Coal Energy Co. (1898.HK, HK$7.11, OUTPERFORM [V], TP HK$8.50) China Shenhua Energy Company Ltd. (1088.HK, HK$29.85, OUTPERFORM, TP HK$38.00) Clough (CLO.AX, A$0.72, OUTPERFORM, TP A$0.97) Delta Dunia Makmur (DOID.JK, Rp250.00, NEUTRAL, TP Rp315) Downer EDI (DOW.AX, A$3.66, OUTPERFORM, TP A$4.10) Leighton Holdings (LEI.AX, A$16.53, NEUTRAL, TP A$17.60) Peabody Energy Corp. (BTU, $22.94, OUTPERFORM [V], TP $29.00) Petrosea Tbk (PTRO.JK, Rp1620, NOT RATED) PT Adaro Energy Tbk (ADRO.JK, Rp1,500.00, NEUTRAL [V], TP Rp1,600.00) PT Indika Energy Tbk (INDY.JK, Rp1,620.00, OUTPERFORM, TP Rp2,700) PT Indo Tambangraya Megah (ITMG.JK, Rp42,050.00, NEUTRAL [V], TP Rp38,000.00) PT Tambang Batubara Bukit Asam Tbk (PTBA.JK, Rp16,250.00, OUTPERFORM, TP Rp19,000.00) Rio Tinto (RIO.AX, A$53.97, OUTPERFORM, TP A$70.00) Transfield Services Ltd. (TSE.AX, A$1.78, NEUTRAL, TP A$2.05) UGL Ltd. (UGL.AX, A$10.60, OUTPERFORM, TP A$13.00) United Tractors (UNTR.JK, Rp21,350.00, OUTPERFORM, TP Rp28,000.00) Whitehaven Coal (WHC.AX, A$2.91, OUTPERFORM, TP A$4.40) Yanzhou Coal Mining Co. (1171.HK, HK$11.54, UNDERPERFORM [V], TP HK$7.10)
Disclosure Appendix Important Global Disclosures Ami Tantri & Dian Haryokusumo each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for ABMM.JK ABMM.JK Date
Closing Price (Rp)
Target Price Initiation/ (Rp) Rating Assumption
3500 3000 2500 2000 1500 1000 500 Rp 0
Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
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3-Year Price, Target Price and Rating Change History Chart for DOID.JK DOID.JK Date
Closing Price (Rp)
Target Price Initiation/ (Rp) Rating Assumption
1800 1600 1400
1200 1000 800 600 400 200 Rp 0
Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
3-Year Price, Target Price and Rating Change History Chart for INDY.JK INDY.JK Date 13-Apr-11 30-Jun-11 15-Sep-11 18-Apr-12
Closing Price (Rp) 4000 3850 2875 2450
Target Price Initiation/ (Rp) Rating Assumption 5400 O X 5000 3900 NC
5400 5010
5000
4510
4010
O
3900
3510 3010 2510
NC
2010 13-Apr-11
Rp 1510
Closing Price
Target Price
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
3-Year Price, Target Price and Rating Change History Chart for UNTR.JK UNTR.JK Date 2-Nov-09 27-Nov-09 13-Jan-10 1-Mar-10 21-Apr-10 3-May-10 30-Jul-10 11-Nov-10 22-Jun-11 28-Jul-11 28-Sep-11 28-Oct-11 30-Jan-12 27-Feb-12 25-Apr-12 24-May-12 22-Jun-12 29-Jun-12 25-Jul-12 26-Jul-12 31-Aug-12 18-Sep-12
Closing Price (Rp) 14850 14600 17750 17150 19800 19300 20150 23450 23500 27150 21950 25200 27850 27350 30450 25250 21700 21350 20750 20050 22450
Target Price Initiation/ (Rp) Rating Assumption 18500 20700 21500 23000 24000 23000 22400 28000 30000 X 37500 30000 31500 33300 34000 N 29000 25700 24500 X 23500 X 23000 28000 O
Indonesia Mining Contracting Sector
37500 34200
34000 33300
30000
29200
31500 30000
28000
22400
22-Jun-11
Rp 14200
Closing Price
N 28000
25700 24500 23500 23000
24200
24000 23000 23000 21500 20700 19200 18500
29000
Target Price
O
25-Jul-12 26-Jul-12
Initiation/Assumption
Rating
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
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Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties. See the Companies Mentioned section for full company names. Price Target: (12 months) for (ABMM.JK) Method: Our target price of Rp3,800 for ABM Investama is based on sum-of-the-parts. We value mining contracting and services at 4x EV/EBITDA, and coal mining at 7x P/E for 2013-a 30% and 20% discount to the sector average, respectively. Risks: Risks that could cause the share price to diverge from out target price of Rp3,800 for ABM Investama include a lower-than-expected coal price, mining contracting volume, and rate. Price Target: (12 months) for (DOID.JK) Method: Our target price of Rp315 for Delta Dunia Makmur is based on EV/EBITDA target of 4.2x for 2013, or 30% discount to the sector average to address the balance sheet risk. Risks: Risks that could cause the share price to diverge from our target price of Rp315 for Delta Dunia Makmur include: a lower-than-expected overburden removal, and a lower mining contracting rate. Price Target: (12 months) for (INDY.JK) Method: Our Rp2,700 target price for PT Indika Energy Tbk is based on sum of parts valuation with EV/EBITDA target for mining contracting services of 6x, and P/E target of 6x for the coal mining, which is at a 30% discount to the sector to reflect the holding company discount.
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Risks: Risks that could impede achievement of our Rp2,700 target price for PT Indika Energy Tbk include: lower than expected overburden removal, lower than expected upcoming contracts, lower coal price and production, and high oil price. Price Target: (12 months) for (UNTR.JK) Method: Our 12-month target price of Rp28,000/share for United Tractor is based on sum-of-the-parts valuations. We have applied 7.5x FY13E EV/EBITDA (enterprise value divided by earnings before interest, tax, depcreciation and amortisation) multiples for its construction machinery, 6.0x FY13E EV/EBITDA multiple for mining contracting, and 5.5x FY13E EV/EBITDA multiple for mining business. We have then deducted the net debt from the enterprise value (EV) (on a consolidated basis) and added associate income to derive the equity value. The implied multiples are 15.0x FY13E price to earnings ratio (P/E) and 6.5x EV/EBITDA. Risks: Key risks to our Rp28,000 target price for United Tractors include changes in government policy, and implementation thereof, on infrastructure projects, fluctuations in the Rp:US$ exchange rate and fluctuations in the commodity prices of coal, palm oil and crude oil and petroleum products. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (ABMM.JK, INDY.JK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ABMM.JK, INDY.JK) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ABMM.JK, INDY.JK, UNTR.JK) within the next 3 months. Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ABMM.JK, DOID.JK, INDY.JK, UNTR.JK) within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml. Credit Suisse Securities (Europe) Limited acts as broker to RIO.AX. The following disclosed European company/ies have estimates that comply with IFRS: AAL.L, RIO.AX. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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