Nov 21, 2010

Indika Energy, unlocking value

CLSA has published a coal report on PT Indika Energy Tbk (INDY) with buy recommendation and target price of Rp4,850 per share.
"Indika is one of our key stock picks in the sector for its attractive valuations and its high earnings growth potential following potential one-off capital gain in 1H11. Stripping out this one-off capital gain, Indika’s earnings would still grow by a healthy 61% yoy. Our SOTP valuation values Indika at Rp4,850, which implies 33% upside and 11-10x CY11-12 P/E, a discount relative to its peers," said analyst Rania Rahmundita in her report published on November 18.
CLSA likes Indika for its very attractive P/E valuations and potential value unlocking exercise of re-listing Petrosea in 1H11. 
This exercise would not only be value-accretive, but also earnings-accretive as it should book a decent amount of capital gain. Hence, it would register stronger earnings growth than peers. The recent divestment by the majority shareholders could also improve the stock liquidity. 
"We reinitiate coverage on Indika Energy with a BUY and target price of Rp4,850. Petrosea re-listing to unlock value Indika must “re-list” Petrosea in JCI and increase the float to at least 20% by Jun 11." 
Not only would this exercise be value-accretive, it would also be earnings-accretive for Indika as it should book a capital gain amounting US$53 million-57 million, based on our valuation for Petrosea at some 10x CY10 P/E. 
This alone already represents 30% of Indika’s FY10 net profit and 33% of the FY11 earnings growth. Additionally, Petrosea will continue to grow healthily by 31%-36% yoy in FY11-12, thanks to new contracts from Kideco.
"Stripping out the potential capital gain from Petrosea re-listing, FY11-12 would see Kideco-driven growth. Kideco growth would form 55% of the company’s net profit growth in FY11, as we expect Kideco to grow in excess of 50% yoy." 
Kideco’s production will grow by 17-15% yoy in FY11-12 respectively, higher than the sector average. Its ASP too will grow by 11-4% in FY11-12, at par with the sector average.
The majority shareholder has recently divested 7% stake in the company, lowering its stake in the company down to 66% and lifting the freefloat to 26.4% from 19% previously. Following this, we expect the stock liquidity, currently the weakest in the sector at only US$7m/day, to improve. 

Disclosure: No position at the stock mentioned above.  

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