Jan 16, 2012

Delta Dunia FY11 overburden up 14.3%

Indonesia's second largest coal mining contractor PT Delta Dunia Makmur Tbk (DOID) reported a lower overburden removal (OB) in December 2011 of 25.8 million bank cubic meter, a -6.8% drop month on month or -14.% year on year.
In a morning note published by Mandiri Sekuritas, the drop was mainly due to higher average rain hours accross PT Bukit Makmur Mandiri Utama (BUMA)’s sites which reached 96 hours, +29.2% higher than last year. Cummulatively in FY11, BUMA produced 334.1 million bcm OB or increased 14.3% yoy and extracted 34.7 metric tons coal or relatively flat to last year (-1% yoy), which below company’s FY11 target of 340 million-350 million bcm OB & 37 metric tons-38 metric tons coal or about 3%-6% below our expectation respectively.
The fourth quarter of 2011 result could be below expectation 
"In 4Q11, we expect DOID to post net profif of around Rp220 billion. Considering the recovery pace still slow following the weather risk, overall the 4Q11’s operational results below the company’s guidance who expect OB capacity should jump to 31 million-32 million bcm per month on average vs actual of 28.6 million bcm. Therefore we expect there is 15%-20% downside of our earnings forecast in 4Q11." 
Earnings forecasts under review. Delta Dunia has the most challenging earnings visibility compare to peers due to its lack of historical disclosure on their capex and different depreciation accounting method. 
Replacement cycle remains our concern for DOID and could be the main risk as we expect the replacement cycle not finish yet. 
Delta Dunia’s capex per bcm basis happened at about US$0.65–US$0.7 which still higher than Pama’s at about US$0.45 – US$0.55/bcm, suggesting lower asset return for investor is expected due to replacement activities. 
"We will take a deeper analysis and review our earnings forecasts and company’s rating after meeting with the company end of this week." 
From Pama and Buma OB performance during 4Q11, Mandiri Sekuritas expects that most of coal companies might report below target of coal production in 4Q11. 
"Following higher rainfall volume as seen starting last month, we do not expect any surprises both for coal production and earnings in the sector during 1Q12." 
Therefore coal stocks might remain underperformed during the quarter. However, as coal prices stabilised at range US$110 – US$115/ton and China’s demand remain robust in 2012 amid concerns on US & European economic crisis, Mandiri Sekuritas expects there is still plenty upside for valuation rerating from the street since the coal stocks has been battered badly about 40% discount from their peak last year. 
But overall in our view mining contracting sectoral looks more interesting and mining contractor still on their momentum to gain pricing power following the booming of coal mining expansion in Indonesia (many IPOs related to coal mining business) to meet China and India demand. 
Based on the latest update we got, the new OB contract currently happened at about US$2.3-US$2.4/bcm, about 10%-15% increase from last year. 

Disclosure: No position at the stock mentioned above.  

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