Swing Trading Opportunity
Coal Price remains Relatively Stable
Coal prices movement remains relatively stable, as shown in exhibit 1, compared to the volatility in the oil price as it used to graze the negative zone. Although, coal price has been decreasing steadily by 25.51% YoY/ 21.94% YTD with an average price of USD61.89/mt, we still see a dependency on this black commodity over the next few years, with China being the lead importers. Coal still dominated 59% within China’s energy mix in FY19 while their coal consumption increased to 3.83 billion tons. We revised down our coal price estimation to USD58.77/mt in FY20E as we see the rise in demand will not be significant, supported by the renewable energy takeover in the US consumption (with 11.5 quadrillion BTU vs 11.3 quadrillion BTU of coal in FY19).
Deep Bottom-Line Contractions in 1Q20
Along with the Covid-19 outbreak that has hampered many industries in the economy, coal mining is no exception. As reflected in the performance of the companies within our universe coverage namely ADRO, ITMG and PTBA. Their top-line in 1Q20 tumbled by -11.34%/-19.23%/-4.02% YoY respectively, due to the decline in the coal price although sales volume by average rose by 2.50% YoY. Meanwhile, deeper contractions were shown in the bottom-line of ADRO (-17.36% YoY), ITMG (-61.24% YoY) and PTBA (-20.57% YoY) which are anticipated with the cut in revenues and the lack of efficiency in the cost strategy. Nevertheless, these performances are still in line with our estimates. Furthermore, these companies have distributed their dividends in 1H20 even though dividend yield from ADRO and ITMG were slashed from a double digit in the previous year (see exhibit 06).
Law Revision as a Jumpstart for Mining Sector
The House of Representatives has approved the amendment of Law No. 4 of 2009 concerning mineral and coal mining which includes: 1) Management and licensing authority, where the central government will have the authority on mineral and coal control; 2) Extension of operating license as some coal companies whose permit is almost expired will be granted an extension for 10 years; 3) Down streaming related to coal gasification and nickel processing; 4) Divestment for companies with foreign share ownership that will be beneficial for the divested companies as they will handle more SOE’s projects; 5) Community mining, reclamation and post mining. We believe this could became a catalyst for the mining sector despite the complications on social and environment matters. For this revision are very facilitating towards coal companies as it provide simplicity in mine permit and management.
NEUTRAL Outlook with Top Picks: ADRO, ITMG and PTBA
MNCS maintains its NEUTRAL recommendationfor the coal mining sector. Still, considering the decline on coal companies stock prices such as ADRO (-21.43% YoY), ITMG (-58.89% YoY) and PTBA (-30.72% YoY) while the contraction in JAKMINE Index (-19.75% YTD) is not as deep as JCI Index (-21.19% YTD), we see potential upsides as we renew our recommendation for ADRO (BUY; TP: IDR1,310), ITMG (BUY; TP: IDR10,630) and PTBA (BUY; TP: IDR2,390).
