Indo Tambangraya Megah Key takeaways from analyst meeting

Indo Tambangraya Megah: Key takeaways from analyst meeting (Under review)

What’s new? Indominco’s cash production in 1Q13 sounds challenging as strip ratio (SR) jumped significantly, in West Block up 38%QoQ to 19.2x and East block up 25.6%QoQ to 9.3x, as company moves to mine new area to maintain high CV products. Company indicated slightly lower ASP in 1Q13 from previous quarter at US$81/t. But, bottom line may be helped by higher production volume which up by 17%YoY to 6.7Mt mostly driven from Trubaindo and Bharinto mines.

Company has changed its 2013 pricing strategy. From 77% contracted volume, ITMG only locked 44% volume at fixed pricing with indicative price of US$80-82/ton (vs historically the norm was about 55-65% fixed pricing in early year), as company expects recovery in coal prices and would like to grab the upside opportunity.

Company plans to release the updated reserves numbers by mid of this year following the new exploration activities and changing in mine plan. Albeit company highlights its exploration activities, we still sense the potential downside on its reserves number due to potential lower coal price benchmark and lower SR as mine plan changed.

ITMG remain bullish on Chinese coal demand.  Marketing director, Mr Hartono, remains bullish for China coal demand in 2013 as China coal import in November and December 2012 jumped significantly by 30% and 60% vs October figure respectively, led to 45%YoY growth for FY12 total thermal coal imports at 147Mt, thanks to cold winter. He highlighted that global coal supply and demand is entering a balance stage due to flattening supplies and internally still expect 19% growth in Chinese coal import for FY13. Product mix challenges may affect overall ASP and export destination. ITMG’s coal export to India has expanded significantly from 3% last year to 12% of total FY12 sales volume.  

Our take -  Based on those facts, we see potential weak 1Q13 results and 2013 earnings remain challenging despite company expects to reduce cash cost by US$4-5/ton to US$63-64/ton (about US$2-3/ton alone from direct production cost and the remaining from lower royalty payment due to lower ASP). Significant higher volume growth in 1Q13 at 17%YoY is not sustainable as company only expects 6%growth for FY13 output, meaning that significant higher stripping activities since 3Q12 – 1Q13 and higher capitalized expenses may not reflect the actual performance, which would put balance sheet and future earnings at risks. If China coal demand this year weaker than expected (as Chinese coal inventories remain high and Chinese PMI remain weak in February 2013), it would put downside risk toward company’s FY13 ASP as it has less fixed pricing. In addition, potential lower coal reserves would bring further negative sentiment to the stock as lack of M&A option would cap its stock price and valuation.

ITMG share price remains resilient among peers mostly due to its attractive high dividend yield supported by its strong cash position. The final dividend payout for FY12 will be announced in April 2013 after the EGM, with indication that company likely to maintain dividend payout at 80% translating total final dividend of US$345mn (including US$197mn interim dividend paid in November 2012, translating into total dividend per share of Rp2,936 (assuming IDR of Rp9,600) or implying 7.1% yield with ITMG closing price of Rp41,450 by year end 2012. This short-term incentive may likely to lead company’s share price move ahead the fundamental in our view.