RHB Indonesia - Coal Mining - Headwinds From PLN Unknown Kamis, 31 Agustus 2017




Good morning,

Coal Mining – Headwinds From PLN

According to Detik, PLN’s procurement director has requested coal companies not to use international prices as a benchmark, when selling coal to domestic power plants. Instead, she recommended using a cost-plus formula to determine the price. If this formula is applied, it would impact Bukit Asam’s performance the most, of the coal players under our coverage. We believe the probability of coal companies applying the cost-plus formula is low, since the Indonesian Government has lifted the electricity subsidy by 15.1% YoY in the 2018 proposed state budget. In light of this new uncertainty, our Top Pick is now Adaro Energy.


¨ PLN requests that coal prices be determined using the cost-plus formula. Perusahaan Listrik Negara’s (PLN) procurement director, Ms Nickye Widyawati, has requested coal prices for domestic power plants to be determined via a cost-plus formula instead of using international prices as a benchmark. She said that while coal prices have increased, the Indonesian Government has determined that PLN’s electricity tariff would not change until end-2018 at least. The Government increased the electricity subsidy to IDR52.2trn (2017: IDR45.3trn) in the proposed state budget for 2018. The The 2018 state budget is scheduled to be finalised and approved in October.
¨ The probability of applying the cost-plus formula. We believe the probability of applying the cost-plus formula in determining the price of coal sold to domestic power plants is small. This is because the Government’s electricity subsidy for 2018, in the proposed state budget, is about 15.1% higher than the level recorded in the revised 2017 state budget.
¨ Final decision from Ministry of Energy and Mineral Resources. Although PLN is very keen to change the benchmark for determining domestic coal prices for local power plants to the cost-plus formula, PLN is not the key decision-maker in this matter. The final decision would be made by the Ministry of Energy and Mineral Resources, the regulatory body for the sector.
¨ If the cost-plus formula is applied, Bukit Asam would feel the impact the most. The average 1H17 gross margin of the listed coal companies in our coverage is 36.2%. If the cost-plus formula is applied, coal companies that sell a sizeable proportion of their coal to PLN would book lower selling prices and see their profit margins narrow. If this is so, the company that would be most impacted would be Bukit Asam (PTBA IJ, BUY, TP: IDR17,400), as around 57.3% (Figures 1 and 2) of its coal sales volume is for PLN. Harum Energy (HRUM IJ, BUY, TP: IDR2,800) should not suffer any negative impact as none of its coal is sold to PLN. All of Harum Energy’s coal sales volume is exported. Every 10% decrease in the average coal price of the coal companies would dampen their earnings by 15-20%.
¨ Top Pick is now Adaro Energy. In facing increasing uncertainty on the coal price benchmark for domestic power plants, we change our Top Pick for the coal-mining sector to Adaro Energy. Our previous preferred pick was Bukit Asam. We believe there may be an overhang in Bukit Asam’s share price, until the Indonesian Government rejects the proposed cost-plus formula. If the formula is applied, we may see downside factors affecting its share price. Meanwhile, Adaro Energy’s earnings should be less impacted, since PLN accounts for only 11% of its coal sales volume. (Hariyanto Wijaya, CFA, CPA)

Link to report: Headwinds From PLN
Link to daily report: Indonesia Morning Cuppa 310817

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Best regards,

Andrey Wijaya
Senior Vice President
Research Analyst – Auto, Consumer, Cement
PT RHB Sekuritas Indonesia

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