Striving through Volume, Cost Management and Diversification
Key Takeaways:
• Coal miners are currently faced with a challenging period where they need to undertake a focus-splitting maneuver in which operational costs optimization, production volume uplift and capital expenditure towards ESG-leaning diversifications must all be met in order to attract investment appetite and refurbish their credit ratings.
• Higher royalty fees, term deposit policies, plummeting prices and the impending carbon tax as well as cross-subsidy scheme (MIP) policies are some of the challenges the sector is faced with.
• Given current circumstances, expect further corrections in HBA prices in 3Q23 before rebounding towards the end of FY23E and into 1Q24 (USD145/t, USD152/t and USD155/t for HBA within ITMG’s GAR range; USD112/t, USD85/t and USD122/t for HBA I within ADRO’s and PTBA’s GAR range for the periods 3Q23, 4Q23 and 1Q24; exhibit 03).
• We maintain conservative projections for the miners this year; with ADRO expected to experience a -41.6% YoY net profit cooldown to USD1.5bn reflecting a NPM of 19.4%, PTBA’s to slip more than -56% YoY to IDR5.5tn (14.8% NPM), while ITMG’s bottom line is poised to fall -48.2% YoY (26.7% NPM).
• Based on our DCF valuation, PTBA holds the lowest EV/Reserve ratio of IDR6,854/t or equivalent to USD0.46/t. Out of the three, ADRO is valued the highest at USD3.31/t, while ITMG is valued slightly lower at USD2.84/t.
• Overall, we call a NEUTRAL stance for the Indonesian coal miners as we believe most of them are fairly priced for now, with several short-term catalysts including conducive weather and China’s increased uptake of their inventories. We still, however, view ADRO to be farily valued at IDR3,100/share which currently offers a 32% upside, given their relatively low SR compared to peers which can help buffer the net profit decline, high export market share and robust 1Q23 production and sales performance, as well as their ample cash reserves to counter refinancing risks and support their diversification capex needs.
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