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26 April 2022

ITMG IJ - MNC Sekuritas Equity Report April 26, 2022

Foreseeing Opportunities Post Dividend

Net Profit Increased Significantly +1,105% YoY in FY21
• ITMG booked a revenue of USD2.08 bn in FY21 or grew by +75.21% YoY (vs USD1.18 bn in FY20). This is driven by an increase in ASP by +93% YoY to USD103/ton although sales volume decreased by -5.2% YoY in FY21.
• GPM increased to a level of 44.13% (vs 16.80% in FY20) followed by OPM which increased to 38.10% (vs 8.77% in FY20) due to an efficient implementation of strategy on its cost of revenue, where it only increased+17.65% YoY. Moreover, net profit increased by +1,105% YoY or USD475.57 mn in FY21 (vs USD39.47 mn in FY20), followed by NPM at 22.88% (vs 3.05% in FY20) We see that ITMG will be supported by an increase in ASP of more than 7% – 10% YoY, amid rising commodity prices and limited production of ITMG in FY22E.

Rising of Demand & Surprising Coal Prices
• Coal prices rose significantly at the beginning of Mar-22 to reach USD400/tons due to geopolitical tensions between Russia-Ukraine. With the concerns regarding the disruption of natural gas supplies to several European countries, the prices of alternative energy commodities such as coal and crude oil had also increased. Moreover, Russia is one of the largest natural gas suppliers, accounting for about 40% of Europe's natural gas needs.
• The global economy is recovering due to the pandemic, China's coal demand which increased +5.10% YoY to 315.73 mn tons in FY21 (vs 300.42 mn tons in FY20). In the future, we see the demand for coal is still quite high, considering the need for developing countries for the availability of power plants or energy is still quite high. We estimate global coal demand will reach up to 600 mn tons in FY22E. Followed by China electricity output reach 6,300 – 6,550 bn KWh, and China Electricity Consumption at 7,800 – 8,200 bn KWh in FY22E.
• On the other hand, we estimate that the supply of coal in FY22E has the potential to increase, in line with the European Union policy that prohibits imports of Russian coal. Therefore, it will benefit Indonesia and Australia, two of the largest coal exporting countries, in supplying coal to several European countries.

Acquisition Plan is an Option
Looking at the development of ITMG's total coal production, there was a decline from 18.5 mn tons in 2020 to 18.1 mn tons in 2021 (vs 23.3 mn tons in FY19). This decrease was due to high rainfall in 2020 which affected most of South Kalimantan. For this reason, in 2Q21, ITMG has acquired 100% of the coal mining company PT Graha Panca Karsa (GPK) for USD31,2 mn, where this acquisition is to replace the production of the Kitadin Embalut mine which had stopped operating in 2Q22. GPK has a concession area of 5,060 ha located in East Kalimantan. With a coal production target of around 200,000 - 1 mn tons in FY22E (est. stripping ratio 4-5x), ITMG's production capacity is estimated to increase by 18.25 - 18.50 mn tons in FY22E (vs 18.10 mn tons in FY21).

Exploring The Renewable Energy
ITMG plans to focus on entering the rooftop solar panel business. Currently, the company is building a Solar Power Plant (PLTS) at Bunyut Harbor, with a capacity of 2 megawatts (MW) which is expected to operate in FY22E. In addition, ITMG plans to diversify its mineral mining business such as gold and nickel, which is still in the exploration stage to see future opportunities. To accomplish the business diversification plan, ITMG will have 3 groups of business lines, namely (1) mining business lines (including downstream mining and minerals), (2) energy services business lines, and (3) renewable energy business lines.

Valuation & Recommendation: BUY at Target Price IDR30,700
We recommend BUY with a target price of IDR30,700 due to the potential increase for ASP, which is going to be higher than last year's USD103/ton, high export portion and potential sales increase from the acquisition of new mines. The risks are: 1) The decline in global coal prices; 2) decrease in total production; 3) government regulations such as increasing the minimum DMO limit to 30% and plans to increase coal royalty rates.

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