CLSA is raising thermal coal price forecasts to US$125 per metric ton for this year and US$115 per metric ton for 2012. In this environment, Indonesian thermal coal producers are firmly in the driving seat.
"We expect sector earnings will double this year. Not surprisingly, valuations look undemanding with the sector trading at 10x 2012 earnings, far from peak. Sector returns will be concentrated," said CLSA's analysts Nicholas Cashmore and Andrew Driscoll in a coal outlook published today by CLSA Asia-Pacific Markets.
Adaro Energy, Tambang Batubara Bukit Asam, and Bumi Resources have the best leverage into the cycle. OWT. "We are making a substantial upgrade to near-term commodity price forecasts to reflect recent supply disruptions and a supportive liquidity environment."
CLSA also has raised our thermal coal price forecasts to US$125 per metric ton for this year and US$115 for 2012. "We now forecast sector earnings will double this year to US$2.6 billion with 63% earnings compounded annual growth rate (CAGR) in the next 2 years."
Coal price leverage underpins earnings growth. CLSA's analysis shows Bumi Resources has the highest leverage to rising thermal coal prices.
But accounting for production growth, state-owned Bukit Asam tops the list with 15.6% volume CAGR over the next 3 years. Bukit Asam also has the life-of-mine expectancy at full production, good for super-cycle leverage.
Stock recommendationsReturns will be concentrated. Indonesia’s 9 largest thermal coal producers account for 85% of aggregate coal produced in the country.
"On our revised forecasts, sector trades at 12x 2011 earnings and 10x 2012, far from peak valuations. Our best ideas remain the same: Bukit Asam, Adaro Energy and Bumi Resources."
Indeed, this is as much a sector call as any. "We are averse only to ITMG at this point, which has a reserve risk that will cramp future earnings."
CLSA's fair value is largely based on a blended valuation basis; higher near-term spot thermal coal prices will drive even more aggressive equity performance.Disclosure: No position at the stock mentioned above.
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