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

Positive Sentiment of Global and Regional lift IHSG to 4972.39

The positive sentiment from the global and regional push the Indeks Harga Saham Gabungan ( IHSG / JCI ) today, Wednesday (04/03/2013). The index at opening rose 15.14 points, or 0.31% to 4972.39.

At 9:22 am, JCI gained 19.552 points, or 0.39%, to level 4976.80. This is the new high level. So far the index has been moving in a bullish trend in the range of 4968.31 to 4985.85

Top Gainers Are:

• PT Indo Tambangraya Megah Tbk (ITMG) +Rp450 to Rp36.450
• PT Japfa Comfeed Indonesia Tbk (JPFA) +Rp250 to Rp9.600
• PT Mitra Adiperkasa Tbk (MAPI) +Rp200 to Rp8.650

Top Losers Are:

• PT Indocement Tunggal Prakarsa Tbk (INTP) –Rp250 to Rp23.000
• PT Matahari Department Store Tbk (LPPF) –Rp200 to Rp11.800
• PT Astra Agro Lestari Tbk (AALI) –Rp50 to Rp18.250

Data from JCI Today March 18 2013

Largest profits:

• PT Astra Agro Lestari Tbk (AALI) + Rp300 to Rp18.250
• PT Nippon Indosari Corporindo Tbk (ROTI) + Rp300 to Rp7.350
• PT Toko Gunung Agung Tbk (TGKA) + Rp300 to Rp3.700

Biggest loss:

• PT Merck Tbk (BRAND) -Rp 2,000 to Rp 150,000
• PT Indo Tambangraya Tbk (ITMG) -Rp900 to Rp39.450
• PT Gudang Garam Tbk (GGRM) -Rp800 to Rp48.450

Regional Markets Conditions:

• Japan's Nikkei 225 -2.71% to 12,220.63
• South Korea's Kospi -0.92% to 1,968.18
• Australia's S&P / ASX 200 -2.05% to 5,015.40
• Hang Seng -2.00%, to 22,083.36

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.