Aug 27, 2010

Too early to be excited with PTBA-Adani

Railway pact with Adani spurs market excitement in PT Tambang Batubara Bukit Asam Tbk (PTBA). Bukit Asam's share price has gone up close to 8% on the back of Adani signing a heads of agreement (HoA) with PTBA to build a new 270km railway line connecting its Tanjung Enim mine with Tanjung Api-Api (towards the east). 
In return, we understand PTBA will pay Adani’s railway fee (just like it does with PTKA) and dedicate 60% of coal capacity for Adani. 
This railway line is different from PTBA’s joint venture with China Railway (that line is towards the south).
"It’s a bit too early to be excited, in our view," said a company report issued by Bank of America-Merrill Lynch on August 26 2010.
For starters, a feasibility study has not even been completed. Since the line will pass only one province, we understand approval from transport ministry is not required. 
But an approval from the provincial governor is still needed. Adani and PTBA also need to sign a coal transport agreement, in our view. That will likely be required when/if Adani wants to raise funds. And then there is land acquisition, which we think could be challenging based on the experience with PGAS’ construction of the SSWJ pipelines. All these combined, we do think it’s too early
to be excited now.
PTBA’s share price looks relatively expensive now. On valuation terms, we believe PTBA is relatively expensive.
The brokerage believes contributions from the existing railway plans and some value from the new railway
project with China Railway (still being engineered) are fully priced in. 
The stock looks expensive compared to its historical P/E. Moreover, PTBA also has to deal with rising costs given the stronger Rupiah. "We maintain our Neutral call."

Disclosure: No position at the stock mentioned above.

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