Bullish in the Short-Term, Cautious in the Long-Term
Key Takeaways:
• We foresee that global coal demand will be primarily driven by China, India, and Europe's economic growth.
• In the short-term, we expect the coal prices will remain at a high level in line with the seasonally high demand during winter in Europe, at least until 1Q23.
• We estimate that in the long term, coal prices are expected to ease in 2H23E and FY24F from records highs in FY22; but remain at much higher levels than their average over FY17-FY21 as slower global growth is a key downside risk to the outlook.
• We expect operating cash flow of Indonesia's coal miners to remain strong based on its forecast for coal prices to stay above the pre-pandemic level. The ample cash flow will support dividend payments and comfortable levels of net leverage. We note that cash outlays are mainly supported by diversification-related investments.
• We maintain an Overweight view on the coal sector in FY23E as the high prices will continue until 1Q23 along with China, India, and Europe’s rising demand. Moreover, most of the coal miners still offer lofty dividend yield; while PTBA (BUY; TP: IDR4,600) and ADRO (BUY; TP: IDR4,550) potentially get the positive impacts from the BLU implementation. Downside risks to our call: 1) lower than expected coal price; 2) China’s coal supply growth; 3) global recession resulting in lower demand, and 4) unfavorable government regulation.
Disclaimer On
