Indonesia Coal Mining - 4Q10 demurrage charge and 4Q10 earnings preview of Indonesian coal mining firms

Indonesia Coal Mining

4Q10 demurrage charge and 4Q10 earnings preview of Indonesian coal mining firms

Downside surprise likely to 4Q10 and FY10 earnings due to demurrage charge: We believe that the demurrage charge could potentially affect 4Q10 and FY10 net incomes of Indonesian coal companies. ITMG reported US$10MM of demurrage charge in 4Q10, which amounted to 16% of 4Q10 operating profit. As bad weather had affected the operations of mines, our channel checks indicate that ships had been waiting for coal shipments at the ports across Kalimantan.

ITMG(Indo Tambangraya Megah), ADRO (Adaro) and BUMI (Bumi Resources) are affected: According to our industry comparison, the effect of the demurrage charge varies across companies, with Kalimantan producers being affected more than Sumatra producers. We believe ITMG, ADRO, and BUMI are affected the most, while the demurrage charge is negligible for INDY and PTBA. ADRO is likely to suffer US$60MM of demurrage charge in FY10E vs. US$18MM (estimate) for BUMI and US$23.5MM (actual) for ITMG. INDY indicated that its demurrage charge is near zero, while PTBA indicated that its demurrage charge is only about US$1MM. The reason for

INDYs very good performance is the availability of excess capacity that has enabled the company to ramp up production to meet its target despite unfavorable weather.

5%-7% downside risk likely to 4Q10 earnings: For companies that are affected, we expect the demurrage charge will result in a 5%-7% cut in consensus 4Q10 earnings forecasts. For full-year FY10, the most affected is likely to be ADRO (11%), followed by ITMG (6%).

4Q10 earnings preview below expectations: Due to the bad weather in 4Q10 which led to lower production volume and higher cost, we believe that Indonesian coal firms will report below-forecasted 4Q10 earnings.

Operations are improving; we maintain our positive view on the sector: We observe that operations are improving across the board for coal companies and believe that starting 2Q11, Indonesian coal companies could start reporting strong earnings. With this, we maintain our positive view on the Indonesian coal mining sector.

analysis by : JPMorgan

Perusahaan Gas Negara (PGAS IJ, Rp3,750 BUY) Steady Flow

BP Migas to prioritize oil production

Falling oil production raises concerns for the government since revenues from oil exports remain important to balance out the cost of imported oil for consumption. In the past five years, oil production has been below 1.0mn barrels per day. This has prompted BP Migas to prioritize an increase in lifting capacity, including a shift in gas production to old oil fields. This is also the case for Conoco Phillips’s gas production. Instead of delivering gas to PGAS, Chevron was given priority to use Conoco Phillips’ gas in order to boost oil lifting capacity. Chevron has relatively old oil wells and they need to be injected with hot gas to lift the oil to the surface. As a consequence of this policy, PGAS’s gas allocation is below the contract numbers. Currently, Conoco Phillips is only able to provide 300-350 mmscfd of gas to PGAS, below its contract of 375mmscfd.

 

Shortfall from Pertamina as well

PGAS also has a gas purchase agreement with Pertamina amounting to 250 mmcfd. However, for unspecified reasons Pertamina has only been able to supply around 170-180 mmscfd or a maximum of 200mmscfd, which falls short of the initial volume under the sale and purchase agreement. PGAS has not been able to confirm when Pertamina will be able to deliver the gas as promised. So far PGAS has not imposed any penalty on Pertamina because of the shortfall. The management guidance of gas volume is around 800-850 mmscfd (which takes into account the shortfall from Pertamina and Conoco Phillips). Our estimate is below 800 mmscfd for the next five years, already reflecting the current situation.

 

Construction to start on West Java floating terminal

PGAS has started construction on the LNG receiving terminal in West Java. Total capex allocated for this project is around US$100mn, mainly for the onshore facility, pipeline and jetty. This capex excludes the FSRU unit as PGAS intends to lease the vessel from Golar Energy, a global FSRU operator. By leasing the vessel, PGAS will not bear the capex for the FSRU and operating start-up time could be faster. PGAS would, however, be liable to pay certain amounts that comprise maintenance and operational expenses. PGAS is fully aware of the lack of expertise it has in operating and maintaining such a unit. The total capacity of the receiving terminal is designed to handle gas of 500mmscfd. However, PGAS has so far only been able to secure around 140mmscfd that will be directly allocated to PLN. According to PGAS, this is basically the break-even volume. Any volume above that amount will translate into profits for PGAS. This project is under PT Regas Nusantara, a joint venture between PGAS (40%) and Pertamina (60%). The project is expected to start commercial operation in 2H12 or early FY13.

 

Maintain BUY

We have already incorporated the shortfall of gas supply from Conoco Phillips and Pertamina in our model. We have not included the upside potential from the LNG receiving terminal due to a lack of gas supply at the current time. With these assumptions we arrive at a DCF Target Price of Rp5,430. BUY maintained.

Land acquisition law in INDONESIA - which sectors would benefit?

 Land acquisition law - which sectors would benefit?

New land acquisition bill -another step of reform: 

The land acquisition bill is currently in parliament. We think there’s sufficient support for the bill to be passed before the end of this year. The new law should enable the speeding up the land acquisition process, which has hindered the progress of infrastructure development. The most important reform in the bill, in our view, would be clarity on the procedures and steps in the government’s land acquisition, by allowing land-rights cancellation and limiting the timing of pricing discussion of land acquisition for public use.
• We identify the beneficiaries from the new land acquisition bill:
1) Toll road player Jasa Marga (JSMR), which has a 73% market share in toll roads, currently has 191km of projects in the pipeline that could add around 10% upside to its fair value. We have an OW on JSMR with a Dec-11 PT of Rp3,600.
2) Property players in Serpong (Bumi Serpong Damai, Alam Sutera, Summarecon), located near the Cengkareng-Kunciran and Kunciran- Serpong toll roads (which are JSMR’s concessions).
3) Cement sector. In the past five years, growth in bulk cement sales (which is partly used for infrastructure and other projects) was merely 2% CAGR. The demand for bulk cement merely comprises 16-18% of total cement demand. We view that growth in the infrastructure sector
will help boost cement demand, possibly adding growth of 4-5 ppt to 10-11% y/y versus the previous 10-yr average of 6-8% y/y. Semen Gresik’s (SMGR) capacity will be able to absorb the additional demand after its capacity expansion in FY12. We have an OW rating on SMGR
with a Dec-11 price target of Rp9,600.
4) State-owned contractors and certain private contractors. This includes companies such as Wijaya Karya, Adhi Karya, and Duta Graha Indah, which have more than 50% of their order books based on government or state-owned projects.
5) Heavy equipment industry would benefit to some extent, in particular through sales to the construction sector.

• Key Risk – a watered-down land acquisition law: A key risk would be a watered-down version of the bill with important clauses such as the land-rights cancellation taken out.

New land acquisition law could provide better clarity on procedures and timing

In the past six years, land acquisition for the Trans Java toll road, which spans 765km, has only reached 37%. The difficulty in acquiring land has hindered the progress of infrastructure development, and also has caused uncertainty in the project implementation scheduling, affecting the rate of return. Such uncertainty has discouraged and hindered the development of infrastructure, such as roads and electricity, in Indonesia.
Positive progress on the procedures of land acquisition bill is evident, as the Consultative Body has authorized the bill on land acquisition to undergo processing. Initial progress suggests that there is a strong likelihood that the land acquisition bill would be passed before the end of this year.

Further reform is needed to encourage the private sector

Indonesia’s Mid-Term Development Plan for 2010-2014 budgeted around Rp1,429 trillion (US$158 billion) of infrastructure projects, of which around 65% will be funded by the private sector. We view that the target is quite ambitious, considering that the contribution from the private sector has been relatively small previously. There are a few groups and companies from the private sector, which have expressed interest to invest in the infrastructure sector. These include Astra International (ASII IJ), with its Astratel subsidiary, and Rajawali group (which recently purchased a
stake in Nusantara Infrastructure - META IJ). To entice the private sector, the government has established infrastructure funds and guarantee funds to guarantee funding. The government has also de-regulated some sectors of infrastructure, such as ports and power plants.
To further support private sector investment, we view that consistency on the policy and implementation of the policy would be needed. For example, under the Electricity Law No. 30/2009, the Perusahaan Listrik Negara (state-owned electricity company) will no longer have the monopoly rights in distributing electricity to end customers. However, it is subject to the “first right of priority” provided to the Perusahaan Listrik Negara.

Indonesia Stock Exchange - Market review 2011-03-01

RESEARCH CALLS

* Infrastructure – The land acquisition bill is currently in parliament. We think there’s sufficient support for the bill to be passed before the end of this year. The new law should enable the speeding up the land acquisition process, which has hindered the progress of infrastructure development. The most important reform in the bill, in our view, would be clarity on the procedures and steps in the government’s land acquisition, by allowing land-rights cancellation and limiting the timing of pricing discussion of land acquisition for public use.

 

* Jasa Marga (JSMR) – Upgrade to Overweight from Underweight, with a new Dec-11 price target of Rp3,600. Raise our FY11E and FY12E earnings by 8%: We change the percentage of tariff hike increase for JSMR from 10% in FY11-12 to 14% in FY11 and 11% in FY12 as we factor in higher inflation.

 

NEWS HIGHLIGHTS

* Indo bond rating – Indonesia is getting closer to obtaining an investment grade rating, its first since the Asian financial crisis more than a decade ago, after Fitch Ratings raised its outlook to positive from stable. "Indonesia only requires a small step toward investment grade," said Darmin on February 24. (vivanews).

 

* Inflation – Deputy governor Bank Indonesia Mr.Hartadi told the press that monthly inflation for February may come in under 0.5%. (Investor Daily).

 

* The government postponing the plan to let gasoline prices go up in Jakarta – ministry of finance Agus Marto told the press that the government will better prepare the fuel subsidy policy before making it effective. The comment follows the early signal by coordinating minister Hatta Rajasa. (Kontan).

 

* Indika (INDY) – short prospectus out on the local press for the IPO of PT Mitrabahtera Segara Sejati (MBSS), upon which time Indika will acquire a majority (51%) stake in the company. Bookbuilding period 1-15 March, listing on 4 April. Local underwriters are OSK and Mandiri Sekuritas. Up to 9M10, the company reported a net profit of Rp158bn (US$17.5mn). MBSS plans to list 215mn shares or 12.3% to buy 20-30 tug-boats with 1200-2800HP, 270-365 feet barges, and floating crane with capacity of 20-45 thousand tons per day. (Kontan).

 

* Agung Podomoro Land (APLN) – the company has revised up internal marketing sales target for year 2011 from Rp3trn to Rp4trn. Since IPO, the company has acquired three new projects namely Green Lake, Green Permata Residences (14ha for Rp190bn), and Grand Taruna (40ha for Rp35bn). (Kontan).

 

* Jasa Marga (JSMR) – the company plans to hike Jakarta-Cikampek toll tariff by between Rp500-2000 on 2 March, following completion of the Cikarang Utama gateway that is expected to cut down travel time by 20 minutes. (Bisnis Indo). 

Analysis by: JP Morgan

AALI (Astra Agro Lestari Indonesia): Growth came from the low-margin generating

Growth came from the low-margin generating 3rd parties FFB

AALI- (Astra Agro Lestari Indonesia) CPO production grew by 17.3%yoy. The figure seemed to suggest a good achievement, but when we go through to the details, the key driver of growth came from the low-margin generating 3^rd parties FFB, which grew by 143.2%yoy. Meanwhile, FFB from Nucleus grew by 11.1%yoy, mainly came from normalized FFB production pattern and newly matured estates of 17,692ha (11.9% of total matured nucleus in FY10) which should result in higher cost per Nucleus unit palm products in FY11F by 8.1%yoy.  We have been concerned on AALI (Astra Agro Lestari Indonesia) organic growth from new planting because of its limited unplanted Rights to Cultivate.  Meanwhile, 63.1% of its planted area (nucleus and plasma) is above 15 years old, declining FFB yield phase. Therefore, we maintain our NEUTRAL recommendation with TP of Rp24,500/share, which implies PER 11F of 15.8x. 

Volume growth is dominated by low-margin generating 3^rd parties FFB.  Jan 11 CPO production grew by 17.3% yoy. Out of 13,592 ton increase in CPO production in Jan’11, around 9,136 ton came from 3^rd parties FFB. Although FFB from 3^rd parties is good to boost CPO production volume, it only generates operating margin of around 10% only, which is significantly lower than the processed FFB from the Nucleus.

Higher cost per Nucleus’ unit palm products. Around 17,692ha (11.9% of total matured nucleus in FY10F) is reclassified from immature (all occurred cost is capitalized to balance sheet) to mature (all occurred cost is expensed on income statement). This newly matured and normalized FFB production pattern is the main driver of the Nucleus’ FFB growth of 11.1% yoy in Jan11 (Remember that in 1H10, there was unusual low FFB production pattern). We estimates Nucleus cost per palm product in FY11F to increase by 8.1% yoy because Nucleus cost per ha is relatively the same between newly matured estates and estates in their pea k production phase, meanwhile FFB yield of newly matured estate only around 9 ton FFB/ha, which is significantly  lower than in the peak production phase.

Concern on limited unplanted land bank for organic growth. AALI just planted around 3,500ha in FY10, a small percentage compared with total planted area of 206,549ha.  The reason is AALI has limited unplanted land bank. We estimate AALI has limited unplanted Rights to Cultivate of around 15,000 ha, which provides a small space for new planting because not all unplanted area is feasible for planting. AALI itself plans to do new planting of 3,000 ha in FY11F.

Maintain NEUTRAL recommendation on the counter. We maintaining our Neutral recommendation on AALI with TP of Rp24,500/share (WACC of 10.9% and Terminal Growth of 6.0%), which implies PER11F of 15.8x