Nov 30, 2010

J.P.Morgan targets Indika at Rp5,000

J.P.Morgan initiates on PT Indika Energy Tbk (INDY) with an OW rating and a Jun-11 PT of Rp5,000, which implies 31% potential upside. 
"We see Indika as one of the most attractively priced Indonesian coal companies (at 11.8x FY11E P/E, vs. peers’ 16.5x) with a promising growth profile. Strong earnings growth in FY10E (50.4%) and FY11E (54.1%) and the planned spin-off of Petrosea in FY11E will drive the share price’s outperformance vs. the JCI in the next 6-12 months," said a company research report published by J.P.Morgan on November 26 2010.
The research revealed several investment drivers such as rising global coal prices and coal volumes at
Kideco Jaya Agung (Indonesia’s third-largest coal miner, in which INDY holds a 46% state), increased liquidity in the shares could cause multiple rerating, teliability in achieving its production targets. 
Petrosea new contracts, strong operations growth, and possible re-listing and attractive valuations compared to peers could be investment drives as well.
INDY has announced its plans to spin off at least 18.6% of Petrosea in order to fulfill the Bapepam’s 20% listing requirement. The signing of new contracts at Petrosea and Tripatra in FY11E could be additional
catalysts.
INDY and Kideco have a track record and reputation of meeting its production targets. Since FY05, Kideco has achieved its annual production target every single year. "We believe that INDY/Kideco stands out among the major coal companies, and will achieve its FY10 production targets, in an environment in which most
major companies risk missing production guidance due to heavy rains." 
"Our price target is derived using a combination of SOTP, DCF, average P/E, and average EV/EBITDA
multiples. We assume an average coal price of US$101/ton in FY11, and our DCF valuation is based on a real coal price of US$90/ton (WACC of 14%, g of 5.5%)." 
Key risks include lack of a controlling interest in Kideco, which raises possible business control risks, operating risks at Tripatra and Petrosea, and risk to consensus earnings forecasts.
 
Disclosure: No position at the stock mentioned above.  

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