Navigating the Turning Points
PT Indonesia Transport & Infrastructure Tbk is officially renamed to PT MNC Energy Investments Tbk (IATA or the Company). The Company also changed its core business activities from commercial air transportation and freight services to investment and holding companies, especially focusing on the coal mining sector. The new business era was marked by the acquisition of Bhakti Coal Resources (BCR) from PT MNC Investama Tbk (BHIT).
Coal Plays Significant Role in Indonesia’s Economy
With the estimated coal reserves of 38.8 bn MT, Indonesia is regarded as the top-10 coal-rich country after US, Russia, Australia, China, and India. The domestic coal production had increased +7.4% CAGR over the last decade from 275 mn MT in 2010 to 564 mn MT in 2020. Accounting for more than 50% of the total coal export, India, China, Japan, and South Korea are Indonesia’s coal export destination countries. In addition, a significant portion of its exported thermal coal consists of the medium and the low-grade type for which large demand originates from China and India. Furthermore, Indonesia is also benefited from a strategic geographical position towards the giant emerging markets.
Outlook: Energy prices to remain high
• Higher commodity prices, particularly coal, benefitted Indonesia’s economy. Non-Oil & Gas exports values jumped to USD219.27 bn (+41.5% YoY), of which mineral fuel exports, including coal, contributed 15.0%. The rising exports were attributable to higher prices and recovering global demand as the economy strengthened since 2H20, although Covid-19 infection continued to overshadow. Given the supply disruption in the energy market to persist, higher oil, gas, and coal prices are likely in 2022. Brent crude and WTI futures prices are already topping USD100/barrel in the first week of Mar-22. Throughout 2021, the global oil supply and demand balance recorded a deficit of 1.6mbpd, propelling oil prices to hit 7-year highs.
• IEA projected global coal demand to hit an all-time high level in 2022. Global coal demand is set to rise to 8,025 mn MT this year. However, this figure did not take into account the Russia-Ukraine conflict that may maintain developed economies prefer coal over gas for electricity.
• We forecast domestic coal production to be 605-631 mn MT in 2022 with improving economic conditions and domestic electricity demand from both the household and the industrial sectors. PLN projects coal demand for the power sector to rise +5.3% YoY this year.
The Greatest Turnaround Stories
IATA believes that its investment in PT Bhakti Coal Resources (BCR) is a good story. BCR is the holding company of the nine coal companies with Mining Business Permits (IUP) in Musi Banyuasin, South Sumatra. With the potential for coal prices to continue to strengthen amid global demand and achieved production targets, IATA’s financial performance in FY22E is expected to improve. The management estimates an increase in revenue of up to 3x in FY22E after suffering losses since FY08. In FY21, BSPC and PMC managed to record revenues of USD68.1mn and EBITDA of USD28.4mn, resulting from the production of 2.6 mn MT. IATA targets BCR to increase production to approximately 8 mn MT in FY22E and 12 MT in FY23F. This is based on the increase in PMC production from 2 mn to 4.5 mn MT and BSPC production from 590,000 MT to 1.8 mn MT, BCR will also start producing mines owned by APE and IBPE for 1 mn MT and 500,000 MT, respectively. As of April-22, IATA had acquired 100% ownership of PMC which in turn would add fully to IATA's profitability.
Higher Visibility in Earnings
Management expects IATA to record strong revenue growth at ~12% in FY22E-FY25F on the back of strong commodity prices and higher coal production, translating to higher top-line, performance improvement, and greater margin. PMC is expected to book 4 – 4.3 mn MT/annum sales volume in FY22E-FYY25F, translating to 6% YoY revenue growth in the same period. Meanwhile, management expects BSPC to have 49% revenue growth in FY22E-FYY25F driven by 1.8 – 4 mn MT/annum sales volume. The blended gross margin should be boosted by these 2-unit businesses which we expect to deliver 62% - 65% gross margin in FY22E-FYY25F.
A more Possibility of Re-Rating
We run the numbers to show how this is possible boosting up IATA’s valuation. Based on the conservative scenario, IATA set 7.57 mn MT sales volume in FY22F or equal to >5% of 138.1 mn MT KCMI resource. We use the relative valuation method using a sample of 3 largest coal companies ITMG, PTBA, ADRO, and the equal assumption of average PE ratio at 5.09x and EPS reaches IDR378 in FY22F. Meanwhile, the average PBV assumption is at 1.40x, and EV/EBITDA stands at 2.34x. The estimated valuation of IATA could be IDR5.93 tn or USD409.11 mn, which implies 3.70x/2.78x of PE/PBV FY22F.
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