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Trimegah Yearbook 2006

Resources

Overweight
Analyst: Sebastian Tobing

Still Appealing

Main Points
 As the global economy takes a breather, we anticipate commodity prices to soften slowly. Sales volume and
efficiency will be the keys to maintain profitability.
 After hitting US$ 66, the Barlow Jonker benchmark coal price has fallen back to the US$ 40 level. However, prices
have stabilized and China's impending liberalization of domestic coal price could provide a catalyst for international
coal prices as well.
 Lower selling prices and higher cost will add pressure on margins, but volume growth alleviates the bottom line
impact. We like ANTM with a 2006 PE ratio of 6.9x and a DCF valuation of Rp 4,200 per share and expect it to post
50.7% revenue growth in 2006. We are also attracted by PTBA's stability and long term prospect, supported by a
clean balance sheet and DCF valuation of Rp 2,100 per share.

Sector Outlook
 The Domestic coal price increase will be in full effect next year
and margins in the mining sector should slightly weaken.
According to our calculations, fuel related costs for BUMI, PTBA,
ANTM and INCO will rise by 41.0%, 20.0%, 16.4%, and 11.9%,
representing 26.0%, 11.0%, 42.7%, and 32.0% of total COGS,
respectively in 2006. The mixed outcome is due to the companies'
different operational characteristics. BUMI's 24.1% volume
expansion in 2006 will come from the new Bengalon pit, which
uses trucks as opposed to conveyer belt in Sangatta. INCO's
hydro power plant helps keep fuel costs low while ANTM's
substantial volume growth outpaces the fuel cost effect.
 China is planning to fully liberalize its domestic coal price soon,
which should provide more incentive for Chinese coal producers
to sell more domestically and export less. Although its export
quota is 65 million tons, we believe that China will only export
around 52 million tons in 2006.
 Another catalyst for growth is Indonesia's own domestic
demand. According to PLN (the state electricity company),
current installed capacity would fulfill only around 70.0% of
electricity demand in 2013, requiring a minimum of 10,000 MW
capacity to be built with coal as the primary option. As Indonesian
coal producers shift their focus from exports to the domestic
market, we expect PTBA to have an advantage considering its
power plant projects and its long-term contracts to sell 70.0%
of its coal to PLN.

Coal and Nickel Prices

 We strongly believe that gold will be the star performer among


commodities next year, as the market ignores the longstanding
negative correlation between gold and the US Dollar and focuses
more on gold's store value as a hedge against inflation. We
expect the average LME spot gold price to be slightly higher
next year at US$470 per troy ounce.
 Commodity prices might be softening, but at a moderate pace.
On a long-term basis, valuations within the sector still provide
a lucrative upside. We like ANTM for its ferronickel volume
growth and its exposure to gold. Using a WACC of 12.8%, we
arrived at a DCF valuation of Rp4,200 per share. In the coal
industry, PTBA is our pick, as we believe that the value of its
power plant projects is not yet reflected in the share price.
Using a WACC of 15.3%, our DCF calculation delivers a fair
market value of Rp 2,100 per share.

Peers Comparison
(US$/ton)
18,000

(US$/ton)
70

EV/EBITDA (x)
7.0

16,000

60
50

14,000

40

12,000

30

10,000

20

8,000

10

6,000

0
Jan-02

 LME 3 months nickel futures closed 2005 at US$ 6.12, only


slighty lower than their one year average of US$ 6.61. Nickel is
used primarily for stainless steel products and stainless steel
demand exceeded supply by 2.6% in 2005. We expect demand
to exceed supply by 1.8% in 2006, somewhat lower but the
supply deficit should keep prices high. The benchmark LME 3
months nickel price should moderate only slightly over the next
few years, with a forecast of US$ 5.70 per pound for 2006
and US$ 5.13 per pound for 2007.

Jun-02 Dec-02 Jun-03 Dec-03 Jun-04


BJI Benchmark Price (LHS)

Source: Barlow Jonker, LME

4,000
Nov-04 May-05 Nov-05
LME 3M Nickel (RHS)

BUMI
6.0

ANTM
5.0

SECTOR

4.0

INCO

PTBA
3.0

P/E (x)

2.0
3.0

4.0

5.0

6.0

7.0

8.0

9.0

Source: Trimegah Research

p.31