Indo Tambangraya Megah First quarter 2013 results is within expectation

Indo Tambangraya Megah:  1Q13 results, within expectation 23.8% ours, 19% consensus (ITMG, Rp34,300, Sell, TP: Rp30,600)

1Q13 results within expectation. ITMG recorded 1Q13 net profit of US$72mn (-42%YoY), within our expectation made up 23.8% our FY13 forecast but slightly below consensus at 19.0%. Quarterly basis, bottom line increased 22%QoQ mainly due to higher other income including derivative gain. 1Q13 operating profit of US$85mn (-50%YoY, -19%QoQ) was 20.2% ours and 18% cons mainly due to higher COGS and opex which up 17.6% YoY and 10.0%YoY respectively.  Operating margin continued decreasing to 15% vs 16% in previous quarter due to lower ASP (-20.9%YoY, -1.2%QoQ).

Strong production growth. ITMG produced 7.1Mt coal in 1Q13 (+24.6%YoY, -11.3%QoQ), accounted for 24.5% our FY!3 forecast and company’s target, relatively strong compare to the last 2 years where 1Q volume made up about 21 – 22% full year target, thanks to pre-stripping activities and good weather. Strip ratio was down 11.4%YoY to 11.7x result in lower total cash cost of US$62.9/t (-11.4%YoY), but quarterly it was slightly higher up by 2.1%QoQ due to higher SR (+6.5%QoQ).

Higher deferred stripping cost at the expense of future earnings. ITMG’s deferred stripping cost in 1Q13 continued to increase by US$13mn (+8.5%) up to US$169.5mn (combined current and non-current) vs end of FY12 of US$156.5mn.  Deferring higher than expected stripping activities may help ITMG’s current earnings performancebut at the expense of future earnings (as most of its counterparts have conservatively expensing or manage their balance sheet). Jorong and Indominco west block which have the shortest mine life-reserves (less than 5 years) have the most challenging stripping activities and unlikely being deferred anymore in near-mid term.

Maintain Sell. Currently we have sell rating on the counter with TP at Rp30,600, offering 10.7% downside. ITMG now is trading at 13.3x P/E FY13F. Lack of M&A option will continue to drag down and cap its valuation, where historically ITMG traded at range 11 – 12x, about 15-20% discount to industry vs currently about par to industry.

for Indonesia Market Summaries, 14 May 2013