CLSA INDO: Coal update

The downside intensity of this bear market has been unprecedented.

It took less than 350 days for the S & P to decline by 50% (437 days in 73-74, 630 days in 2000-2002).

The extreme collapse has brought about extreme bearish sentiment. A powerful market rally is long overdue. However, i am convinced this is only a bear market rally as it is almost impossible to envision global growth to return anywhere near the previous peak.

Having said that, there is a lot of value in certain areas like commodities where I am happy to add on position on the way up. With Central Banks determined to fight deflation by printing trillions of dollars out of nowhere, they will ultimately prevail but the consequence will be horrible inflation down the line.

The initial phase of inflation will no doubt create a sense that conditions have stabilized. (note consumer prices have been rising in the US). I am afraid there is no free lunch. It is reported by Deloitte that China is looking to invest US$500b in resources outside of China. $22bn worth of deals has already been announced in the last month alone.

Premier Wen said China has decided to diversify its foreign exchange reserve holding (US govt bond yields have nowhere to go but Up, up and up). Sell dollar high and buy commodities low (a weaker dollar will eventually be required to reverse deflationary forces). Interesting to note the recovery of copper prices (highest in more than four months) at the same time stockpiles have slumped about 9 percent since Feb.

If China remains aggressively committed to acquiring commodities, it could signal a turnaround in the fortunes of global and material producers. As a resource rich economy with low debt to GDP, Indonesia will be very well positioned.

CPO prices have recovered 35% from Dec 08. This will translate to higher disposable income for farmers in the region. Note that the Rp has strengthened more than 5% in the last few days. I would take profit on Banks and Buyers of Antam, Inco, LSIP, SGRO and ITMG.

Trading wise, we are 2x net buyers for today.

Research Today:

Coal analyst Olie examines the latest PTT acquisition. Thai´s PTT (PTT TB) will take a 60% stake in Straits Bulk and Industrial (SBI), a wholly owned subsidiary of Strait Resources Limited (SRL). SBI in turn controls a 47.1% stake in Straits Asia Resoucres (SAR SP), coal asset inBrunei and Madagaskar.
Bottom line is that while on a PE basis, the transaction looks reasonably priced (in line with the average PE09 of Indonesian coal names), on the more important EV/reserves measure normally used M&A purposes, the transaction commands a hefty premium of almost 3-4x its Indonesian peers, making Indonesian coal stocks look very cheap.
Trading wise, I would switch out of Astra International and the banks and get into coal and base names.

Key points of the report:

· PTT plans to acquire 60% stake in SRL wholly owned subsidiary that controls SRL coal assets, including Straits Asia (SAR).

· Since SAR would be the only company generating earnings in the JV, the implied PE09 that PTT would be paying for SAR ranges between 3.9x to 5.1x, based on consensus forecasts, in line with average multiple of Indonesian coal companies though suggesting a 28% to 95% premium to pre-announcement price.

· Indonesian coal names look cheap on reserves basis as the deal valued SAR three to four times than those for Indonesian names.

· We do not expect M&A to happen soon to Indonesian coal majors, as some of the controlling shareholders of the listed Indonesian coal companies do not need to do capital raisings while government owned company is not available for sale due to its politically sensitive nature.

· Adaro could be the only one with M&A angle as 1) it is not controlled by a single majority, and 2) financial investors, controlling around 25% stakes, could be willing sellers after.

· We stick with quality names, ITM (ITMG IJ) and Bukit Asam (PTBA IJ) Aneka Tambang (ANTM IJ) FY08 audited results from Olie Slight difference from the unaudited one The company release its FY08 audited result, with net profit arrived at Rp1,368bn, down by 73% YoY, but around 4% higher than the unaudited figure.

The difference was a result of completion of acquisition of BHP 75% stakes in Gag Island nickel project, where from all assets this project have been fully consolidated into Aneka Tambang. Therefore, we are seeing higher than previously reported exploration expenses, amounting Rp354bn as compared to Rp130bn previously reported, and gain from debt write-off amounting Rp263bn. Note these are all non-cash items.

Wijaya Karya (WIKA IJ) 2008FY results slightly below expectation by Hadi Core profit matched our expectation but net profit below forecast. FY08 Revenue Rp6.6tn grew 53% YoY on the back of increasing infrastructure projects. FY08 Gross and operating margins were declined due to rising material cost which could not be fully passed-on to customers. FY08 Net profit Rp156bn (up 21% YoY) was 13% below our forecast. The main differences would be on higher allowance for doubtful expense.

Wijaya Karya made provision on aging receivables from a shopping mall project that is near completion. We believe these receivables should gradually collected when the project start operation this year. As of February 2009 Wijaya Karya has secured Rp15tn worth of order book for 2009-2011. We estimate Rp6tn will be converted to 2009 revenue which is already 76% of our forecast. Maintain BUY.News Headlines/Others: US$15bn China-Indonesia swap deal secured. The US$15bn currency swap is to provide short term foreign exchange liquidity and helpIndonesia improve tight liquidity.

The three year swap arrangement is on top of the multilateral swap agreementIndonesia secured under the Chiang Mai summit. According to local media,Indonesia ´s forex reserve stands at US$53.9bn in mid March 09. The Rp73.3tn stimulus starting to flow this week. The government announced that its Rp73.3tn (US$6.3bn) stimulus package to help the economy has started to flow.

About Rp56.3tb of the stimulus has been channeled in the form of tax incentives and about 13.3tn of the tax incentives is allocated to tax subsidies and import duties exemption for certain labor incentive industries. Total Oil Indonesia launching its first two retail gasoline stations. Total, the oil major from France intends to open a total of five gasoline stations in 2009 and targets to open a total of 200 gasoline stations in the next five years. The cost of a gas station is estimated at US$2m with 10,000 liter sales targeted each day.

Comment:

A number of other oil majors such as Malaysian Petronas, and Shell have enteredIndonesia since the industry deregulation took place in 2005. Financing for the 10,000MW fast track power plant project is still 30% short. The Finance Minister just came back from China and said that both countries had reached an agreement to continue the existing loan agreements for the 10,000MW project.

However there was no additional loan agreement announced for the remaining 30% financing required to complete the project. Previously reported that PLN (The State Electricity Company) is also negotiating with Middle East Investors and JBIC for financing alternatives. We estimate the project investment cost to reach USD10bn which USD7bn is already secured from PLN equity and loans from Chinese and local banks.

Indika Energy - Loan for Cirebon power project secured? It was reported in the newspapers that consortium of Bank of Tokyo Mitsubishi, ING, Mizuho, and Sumitomo Mitsui have agreed to finally provide US$525m financing to 660MW Cirebon Power project. Indika Energy that owns 20% equity in the project has yet to confirm the news though. Note that negotiation for financing has been on going for 18 months hence any loan agreement would be considered positive, though contribution of this project to total Indika estimated NAV is relatively small. Shipper Arpeni Pratama (APOL IJ) delays acquiring nine ships. APOL IJ has canceled the purchase of nine Panamax ships worth US$200m. APOL has a shipping fleet of 78 ships.

Comment:

The company is burdened by its heavy debt level as net debt to equity is 188% as of 3Q08. Indonesia´s LNG exports minimum requirement to be slashed. Indonesia will reduce Japan ,South Korea , andTaiwan ´s minimum in purchasing LNG by max 70% from the previous 15% stated in the contract. This was proposed to help these three consumers countries as the domestic demand in the countries slumped. This means they can reduce their purchases of LNG by 844k ton (total contracted 1.2mt).

Matahari (MPPA IJ) offers 16-17% interest on its bonds. The Rp500bn bond targeted for issuance in 3Q09 is estimated to have coupon rates of 16% and 17% for the 3 years and 5 years maturities. SuramaduBridge to be completed this year. The government targets this bridge to be completed in mid 2009. This 5.4km bridge progress, which is the longest bridge in Indonesia and will connectSurabaya and Madura has been 93% completed. The tariff is estimated to be Rp23k (one third of Ferry´s tariff of Rp70k)

Key Indicators:

JCI: 1,406.647 +45.758 (+3.36%), T/O US$225.2 mil Well ensconced in a "bear market raly", the index is set to post its 5th consecutive gain today. Volumes managed to double from daily averages y'day as both local and retail investors moved back in. Foreign institutions were focusing on the big cap names, so the telco's, banks, consumers outperformed As of this morning, book is 2.5x better buyers.

Chart of the Day:

Did You Know? That 2.6m babies are born every year inIndonesia ? Indonesia currently has a population of 230.6m. If the birth rate is not slowed down (now at 2.6 children per woman), the country could see a population of 261m by 2020. The government has targeted to cut the birth rate to 1.3m babies per annum by increasing birth control awareness. The birth control agency said it needs to add another 13,000 staff to its existing 22,000 employees.

Daniel Oen
CLSAIndonesia Institutional
SalesPhone: (62-21) 2554-8802
Toll free - HK: 800-938-000 Toll free - SIN: 800-621-1104
Toll free - US: 800-460-2581daniel.oen@clsa. com