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Company Update

26 Oktober 2020

Coal Mining Sector Update 26 October 2020

COAL MINING SECTOR UPDATE

 

Paying the Price for the Future Value

 

Omnibus Law: Opportunity or the Opposite?

Another turmoil was triggered by the Government through the newly passed Omnibus Law. Changes regarding the coal mining sector are as follows: 1) Imposition of 10% Value Added Tax (VAT) to coal commodity; 2) 0% Royalties for coal companies that has done a downstreaming (exhibit 05). The true purpose of this is to increase the value of the commodity, rather than solely exporting raw coal, which will be of advantage in the future by escalating state revenue from both non-tax and tax revenue as well as companies’ income. The government is also aiming for a higher foreign investment which will be in a shape of a cooperation to build a certain plant or facility as done by PTBA IJ.

 

The Cost and Benefit regarding the Current Stance

But there’s a long winding road to reach the end goal. A downstream project will surely need a feasibility study beforehand while the facility is definitely not so affordable and will take years to build. With this in mind, some companies are still heavily relying on coal export such, namely ITMG IJ and HRUM IJ. So based on exhibit 05, we can conclude that only several companies will be benefitted from the 0% royalties, while many companies are now racing to fulfill the requirement. Nevertheless, the advantage won’t be as significant as we reckon that the exemption only applies for downstream generated revenue. Subsequently, the implementation of VAT on coal sales will caused a larger negative effect because it will put tension on both parties. Supposedly, if the coal miners were the ones bearing the tax then it will potentially slashed their profit margin. So another scheme is a burden-sharing with the customer, which we estimate will hurt the future coal demand. Accordingly, we will wait on further details from the Omnibus Law regarding coal.

 

Exports are Rolling Downhill

The heated issue from the China coal ban continues along with the renewable energy movement. These are reflected on the coal price (exhibit 01) which has dropped by -16.35% YTD though lately the price slowly hikes. Furthermore, the increasing domestic coal production and inventory has caused China to cut back on their coal import as it decreased by –7.24% YTD followed by coal export from Indonesia which dropped by –10.64% YTD. A deep concern for future coal export in Indonesia due to a large contribution towards China (exhibit 2). Surely this increase awareness on the government long ago following the downstreaming policy and it doesn’t stop there, alarming as it is, the President has respond on the following issue by a future ban on raw coal export. Though uncertain of the timeline, this will poorly affect the strictly exporting companies but will majorly affect the coal price as Indonesia is one of the largest producers.

 

NEUTRAL Outlook with Top Picks: ADRO IJ (BUY; TP: IDR1,310)  and PTBA IJ (BUY; TP: IDR2,390)

We maintain our NEUTRAL recommendationfor the coal mining sector. Despite the challenging future, we still consider potential upsides on ADRO IJ (BUY; TP: IDR1,310) and PTBA IJ (BUY; TP: IDR2,390) for being the most well-prepared companies which will paid off quicker than the others. However, we decide to exclude our recommendation for ITMG IJ due to it’s high sensitivity towards the commodity price movement caused by it’s heavy reliance on export and by having the lowest production realization compared to peers. Moreover, as long as the law and the ban has not been implemented, coal will still gain advantage from the upcoming winter, in which we hope for a revival on the demands. But note that the growing awareness of global investors toward ESG (Environment, Social, Governance) investment will potentially be a threat for the stock performance in the long run.

 

Disclaimer On

PTBA, ADRO, ITMG, HRUM, BUMI, UNTR, INDY

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