RHB Indonesia - Coal Mining - Share Price Correction Overdone (Coal Mining, Basic Materials Building, Adhi Karya) Unknown Kamis, 14 September 2017




Good morning,

Coal Mining - Share Price Correction Overdone

We believe the excessive share price correction yesterday was overdone, and see it as an opportunity to accumulate coal-related stocks that have low exposure to PLN. Incorrect news reports on approval from the MEMR to use the cost-plus margin formula resulted in the hammering of all Indonesian coal-related stocks yesterday. In fact, the Minister of MEMR, Mr Jonan is still open to receiving input from coal companies regarding the cost-plus margin formula. We continue to like the coal mining sector as we think rising coal prices should benefit earnings. Consensus is still using coal price assumptions of USD70-80 per tonne, although FOB Newcastle coal price (6,300 kcal/kg) reached USD102 per tonne yesterday. Our Top Pick in the sector is Adaro Energy (ADRO IJ, BUY, TP: IDR2,300) as we believe Adaro Energy has low exposure to PLN.


¨ Incorrect news reports on approval from MEMR to implement cost-plus margin formula have hammered Indonesian coal-related stocks. On 12 Sep, news portal Detik reported that the Directorate General of the Ministry of Energy and Mineral Resources (MEMR) Mr Andy N Sommeng said that the Minister of MEMR, Mr Ignasius Jonan has already agreed to PLN’s request to use the cost-plus margin formula (vs international coal price benchmarks) to set the coal selling price for domestic power plants. The news hammered all Indonesian coal-related stocks, regardless of whether they are exposed to Perusahaan Listrik Negara (PLN).
¨ In fact, the Minister of MEMR is still open to receiving input from coal companies regarding the cost-plus margin formula. After market close on 13 Sep, Detik quoted the Advisor to the Minister of MEMR, Mr Hadi M Djuraid that Mr Jonan is still open to discussions with coal companies before deciding on the right coal pricing formula for domestic power plants. Based on our discussion with Bukit Asam, the company has still not gotten any information about the proposed cost-plus margin formula from MEMR.
¨ Sensitivity analysis. About two weeks ago, PLN requested for the coal selling price to domestic power plants to be set based on a formula with cost-plus margins of between 15-25%. PLN had submitted the request to MEMR. The coal mining company that is most exposed to PLN is Bukit Asam (Figure 1). Around 57% of Bukit Asam’s total coal sales volume is to PLN. If MEMR decides to implement the coal selling price formula for domestic power plants at cost plus a 25% margin, then Bukit Asam’s FY18F-19F earnings could decrease by 18% and 15% respectively based on our current earnings forecasts. Meanwhile, Adaro Energy’s FY18F-19F earnings could decrease by only 3% and 2% respectively based on our current earnings forecasts (Figure 2).
¨ Maintain OVERWEIGHT on the coal sector with Adaro Energy as our Top Pick. We see an opportunity to accumulate as we think yesterday’s share price correction across the board in the Indonesian coal mining sector was overdone, in reaction to the potential implementation of the cost-plus margin formula. Adaro Energy is our Top Pick in the coal mining sector given its low exposure to PLN, its stock liquidity, and the fact that it is a beneficiary of rising coal prices.
Key risks include unfavourable Indonesian Government policies on coal, a significant drop in coal prices, weaker-than-expected coal demand, and a strengthening IDR. (Hariyanto Wijaya, CFA, CPA, CFTe, CMT)

Link to daily report: Indonesia Morning Cuppa

Sector Update:

Building Materials - Higher Monthly Sales But Margins May Narrow
Domestic monthly cement sales rose to 6.5m tonnes (+15% MoM, +9% YoY) in August. YTD, 8M17 cement sales increased to 41.1m tonnes (+6% YoY). We believe that higher infrastructure projects were likely the main driver of the monthly cement sales growth. Cement sales are cyclically higher in the second-half of the year. However, our ground checks suggest that cement retail selling prices are still on a declining trend in the Jakarta area. Hence, the cement companies’ respective 3Q17 EBIT margins may be still under pressure. Maintain NEUTRAL.

¨ Higher infrastructure projects boosted cement sales growth. YTD, 8M17 domestic sales volume came in 41.1m tonnes (+6% YoY), driven by bulk cement sales which grew by 8% YoY, while bag cement sales increased by 5% YoY. This indicated that higher infrastructure projects were the main driver of cement demand growth. Sales of bulk cement, which is commonly used for infrastructure projects, accounted for around c.24% of 8M17 cement sales.
¨ Although better sales, the two largest cement makers lose their respective market shares. According to our calculations, YTD, Semen Indonesia’s market share slipped to 41% in 8M17 (from 41.5% in 8M16), while the Indocement Tunggal Prakarsa (Indocement) had a market share decline to 25.5% from 26.3% during the same period. Indocement lost its market share in its home-market ie the West Java area – Jakarta and Banten, among others – because of heavy competition. In this aspect, Semen Indonesia is likely to benefit from its diversified home-markets – East Java, West Sumatra, and South Sulawesi – as the company experiences less competition from other cement players in these markets compared to West Java.
¨ Cement retail selling prices still on a declining trend. Our ground checks suggest that retail selling prices of bag cement in Jakarta were still on a decline in August, especially the 40kg bag. In the Jakarta area, the average retail selling prices for Semen Indonesia’s Semen Gresik, Indocement’s Tiga Roda, and Holcim in Jun-Aug 2017 declined by 6% QoQ, 9% QoQ, and 12% QoQ, respectively, compared to the average retail selling prices in Mar-May 2017. This retail selling price trend is in line with the domestic ex-factory ASP, which is disclosed by Semen Indonesia each month. (Andrey Wijaya)

Link to report: Higher Monthly Sales But Margins May Narrow
Company Update:

Adhi Karya – 8M17 new contracts still lacks thrust
Adhi Karya’s 8M17 new contracts achievement was below seasonality with IDR8.9trn or 42% of target compared to the 3-year average of 54%. Adhi’s management is still optimistic in achieving its new contracts target of IDR21.4trn. However, we see the lack of clarity on the financing scheme of LRT phase-1 is a risk that could delay the progress of the project and subsequently its LRT City projects. The stock currently trades at 12.4x-8.6x FY17-18F P/E. Our recommendation is Under Review.

¨ Below seasonality. In 8M17, Adhi Karya booked IDR8.9trn of new contracts (excluding LRT phase 1 project) which represents 41.6% of its FY17F new contracts target. Looking at the seasonality trend, this achievement is way below the three-year average of 54% of the full-year figure. In Aug 2017 alone, it booked IDR1.8trn of new contracts or slowing down by -30.8% YoY. Contracts signed during the month include Bekasi Trans Park (IDR596.2bn), Great Mosque of Batam (IDR237.1bn), and Kualanamu Toll Road Section 7B (IDR225.9bn).

¨ Building projects dominate new contracts. After excluding the LRT phase-1 project, building projects accounted for 66% of total 8M17 new contracts, while road & bridges projects contributed 15% and other projects’ 18%. The source of the contracts is distributed almost evenly between the Government (34%), SOE companies (31%), and private companies (35%).

¨ What company’s view. We also held a discussion with the company recently and Adhi said that it still optimist to achieve its new contracts target of IDR21.4trn (excl. LRT phase-1). The recently-launched LRT City project is said to be the potential driver for the company in the future along with the completion of LRT phase-1. After phase-1 is done – which is targeted to complete in May 2019 – Adhi will look to take further part in the phase-2. Adhi will seek investment in the Cibubur-Bogor segment of the second phase if they could not secure the contracts entirely.

¨ What we think. We see that the lack of clarity on the financing scheme of LRT phase-1 is a risk that could delay the progress of the project. This in turn could hinder Adhi’s plans for LRT City. We also opine that Adhi needs to catch up on securing contracts beyond LRT-related works to soften the blow in case the uncertainty on the LRT payment scheme drags on. The stock currently trades at 12.4x-8.6x FY17-18F P/E. Our recommendation is Under Review. (Michael Halim)
Media Highlights:

Corporate

Ministry of Economics wants credit interest rate at single digit
Astra International takes an extra IDR1.8trn stake in developer
Wika Beton books IDR3.2trn new contracts in 8M17
KAEF acquires 3 pharmaceutical companies
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Company Update: Bukit Asam – Assesing PLN’s Request On The Coal Price Formula
Economics Update: July Loan Growth Picks Up, M2 Growth Moderates
Economics Update: August Inflation Remains Moderate After Holiday Season
Results Review: Perusahaan Gas Negara – Another Downside Surprise On Distribution Margin
Company Update: Astra International – Rising Auto Competition, Promising Mining Units
Sector Update: Coal Mining – Headwinds from PLN
Link to report: Headwinds From PLN
Results Review: Adaro Energy – Strong 2Q17 Earnings


Best regards,

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

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