Aug 11, 2010

Adaro, Bukit Asam seems too expensive

Bullish Indo coal apparently still not a consensus view. Bank of America Merrill Lynch recently met more than 20 Singapore-based investors to discuss our recent note on Indo coal titled The changing Landscape for Indo Coal Miners".
What did they say about Indo coal companies?
Half of the investors were hopeful of a higher coal price in fourth quarter (4Q) going into 2011, while the other half were simply bearish, which is not surprising given the falling Chinese/export coal price. But putting coal price aside, most investors showed genuine interest in Straits Asia Resources Limited (SAR) but thought PT Adaro Energy Tbk (ADRO) was expensive.
"They like PT Indika Energy Tbk, last month’s best performing stock, whose share price rose 23%. Falling coal price in China, the major pushback to our call The biggest pushback from investors was the falling Chinese coal price, which they felt would pull down seaborne price," said the report on coal industry overview released by Bank of America Merrill Lynch yesterday.
Investors were also concerned about the pick-up in hydro power generation in China. The coal price in Qinghuangdao port (CV adjusted) plus US$4/ton port fee and US$7/ton freight from the South is estimated to be around US$128/ ton vs.
Newcastle price of US$120/ton (including US$8.50 freight cost, 17% VAT, US$5/ton port charges). While Chinese coal price falling further from here (about 10%) on weaker demand, though not steeply,
Rising interest in SAR, the brokerage sensed rising genuine investors’ interest in SAR, even from those who were disappointed by its execution.
They seemed to be willing to give SAR a second chance, mainly because the granting of forestry permit is likely around the corner--especially after PT Indo Tambangraya Megah Tbk’s Jorong mine recently got a permit, renewed hope, especially with a new CEO, Martin Purvis, who is one of the few Indo coal mining CEOs with a mining background, and also earnings improvement seems on track.
Investors in general like Adaro Energy due to its strong growth potential and good track record. However, most investors were concerned that Adaro Energy seemed too expensive.
But again, there are limited options for investors to play Indo coal if they want size and liquidity.
Investors agreed that PT Tambang Batubara Bukit Asam Tbk (PTBA) looked expensive compared to peers.
The contributions from existing railway plans and some value from the new railways seem fully priced in, while track record of execution has been relatively slow.

Disclosure: No position at the stock mentioned above.

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