Coal sector 15-Nov-2017 concessions will remain the key coal supply bottleneck in Indonesia. Existing well-established coal miners are still aiming for flattish to single-digit indicative

ed:CK / sa:MA, PY

2018: Muted output growth to support coal prices

Strong coal prices will support miners’ ASP in 2018

Coal output growth to remain modest next year

Market is still being conservative in pricing coal miners

Top picks of the sector: ITMG and ADRO

Sustained high coal prices will benefit miners’ ASP in

2018. Strong coal prices in 4Q17 will support coal miners’ ASP and earnings performance in 2018. While coal prices are still above our long-term benchmark average price of US$65-70 per ton, we believe that coal prices will remain robust as the rainy weather around Kalimantan mining concessions will hinder any strong output expansion, even as coal prices stay at a relatively high level of above US$75 per ton.

Muted coal output growth will keep coal prices strong.

The limited capital availability to develop and redevelop mining concessions will remain the key coal supply bottleneck in Indonesia. Existing well-established coal miners are still aiming for flattish to single-digit indicative growth for coal output in 2018. Moreover, given the lack of consolidation opportunities, we expect some coal miners to preserve their coal reserves to extend their operational activities going forward.

Market still conservative on coal counters, pricing in

higher fuel prices. We believe the strong earnings potential of coal miners should be valued higher than 10.0x FY18F PE. As Indonesian coal players have also adopted a conservative mining strategy, there is leeway to deliver sustainable earnings growth, even if crude oil prices approach US$65 per bbl, by focusing on maintaining their solid cost structure.

We prefer miners with strong cost control, exposure to

export market – ITMG and ADRO. We prefer miners with sound operational and cost control over its mining activities, such as ADRO and ITMG. Both miners also have the largest exposure to the export market. In our view, we believe the export market will provide better pricing leverage amid higher global coal benchmark prices relative to the domestic market currently.

JCI : 5,988.30

Analyst William SIMADIPUTRA +62 2130034939 [email protected]

Adaro Energy : Indonesia second largest coal producer. It also has subsidiaries that operate in the mining contracting, barging and ship loading business

Indo Tambangraya Megah : One of the largest coal mining company Banpu. Coal consession located in Kalimantan, Indonesia

Tambang Batubara Bukit Asam : Indonesia largest coal miners with 1.99bn ton of coal reserves. Main coal mining concession located in Tanjung Enim, south Sumatera

Newcastle coal price benchmark trend forecast

Source: DBSVI

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DBS Group Research . Equity 15 Nov 2017

Indonesia Industry Focus

Thermal coal sector

Refer to important disclosures at the end of this report

STOCKS

12-mth

Price Mkt Cap Target Performance (%)

Rp US$m Price (Rp) 3 mth 12 mth Rating

Adaro Energy 1,815 4,287 2,500 (2.2) 9.3 BUY Indo Tambangraya Megah 20,575 1,717 25,000 0.7 14.3 BUY Tambang Batubara Bukit Asam 11,800 2,006 16,900 (10.3) (13.2) BUY

Source: DBSVI, Bloomberg Finance L.P. Closing price as of 14 Nov 2017

Industry Focus

Thermal coal sector

Page 2

Margin management is the key thing to watch

We believe the coal miners that can manage their margins well will emerge as the winners in 2018. The still high coal prices do not mean that all coal miners can post stronger- than-expected earnings in 2018, in the face of higher crude oil prices next year. We understand that the average coal benchmark price is still hovering around the US$90 per ton level in December, which is fairly high relative to our long-term coal price forecast of US$65-70 per ton. However, given the latest supply developments, we believe that the global coal benchmark price in 2018 will potentially stay at above US$75 per ton. We are expecting a 10%-12% y-o-y increase among miners’ ASP next year. However, as the higher coal price ASP trend may be offset by higher crude oil prices, we expect a more stable earnings performance in 2018. This is still largely in line with our expectations for coal companies earnings outlook under our coverage, even as coal prices have performed stronger than expected YTD.

Newcastle coal price vs. crude oil price trend

Source: Bloomberg Finance L.P, DBSVI

Sustained high coal prices will benefit miners’ coal

pricing in 2018.

Stronger coal prices in 4Q17 will support coal miners’ ASP and earnings performance in 2018. Coal pricing contracts are essentially a B2B arrangement between coal miners and buyers – which typically are direct end users such as power plants and cement producers, or coal traders. The pricing mechanism is usually based on the trailing performance of the average coal benchmark index, be its three months or six months, with a portion of the sales volume using spot pricing.

Coal miners’ ASP trend and coal benchmark price trend

Source: Company, DBSVI

Given that the coal price outlook will remain strong until 4Q17 on winter seasonal restocking, we believe that the coal benchmark index buoyancy will benefit coal miners in terms of ensuring that coal prices remain robust in 2018. We understand that relying on negotiations per se will not help boost miners’ coal pricing to US$80-90 per ton, though the currently buoyant sentiment on coal prices could provide a benchmark price floor of US$70-75 per ton for coal miners. Newcastle coal price benchmark trend (US$ per ton)


Slow supply expansion will persist in 2018 Besides the seasonal winter restocking that will support coal demand in the short term, we believe that coal price has limited downside potential even if it is trading at a relatively high level of US$90 per ton in view of the slower-than-expected output expansion from seaborne miners, especially in Indonesia. In the short term, a protracted rainy season in Kalimantan concession areas would continue to hinder production activities in 2H17. This poses another short-term output expansion challenge for Indonesian coal miners. The resultant slower-than-expected output expansion would certainly not

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Parity movement trend in coal and oil price; expecting stable margin performance in 4Q17 and 2018

Industry Focus

Thermal coal sector

Page 3

be able to rebalance coal prices towards the range of US$70-75 per ton. As a result, Indonesia is likely to miss its FY17 coal production target of 477m tons, given that 1H17 domestic coal production came in at only 139m tons. In the medium term, we also see a number of challenges for miners in ramping up their production. Their mining strategy that was previously adapted to cope with low coal prices may hurt several miners’ long-term mineable coal reserves in light of the aggressive cut in strip ratio involved. Adjusting the strip ratio could provide a short-term solution for some miners, but a massive overhaul of their current mining strategy may be required in the long term. The thinning credit flow towards resources-related sectors, such as coal mining, will limit producers’ ability to expand their output, whether for developing their existing mining concessions or acquiring new mining concessions. We have yet to see a major revival in credit appetite towards the sector. Perhaps the creditors are still spooked by the incidence of rising non-performing loans (NPL) that hurt the banking industry in 2012-2014. Credit flow to mining resources sector

Source: Bank Indonesia, DBSVI

Moreover, mining machinery distributors are still conservative in managing their orders and inventory. Machinery players such as United Tractors (UNTR IJ), the main distributor of Komatsu machineries, are still reluctant to take on a higher inventory level despite its improving sales volume. UNTR’s sales volume reached 320 units per month on average in 2017, which represents an improvement compared to that of 2015-2016 but still lower vs. that of 2011. However, UNTR has no intentions to restock its machinery inventory on a large scale to boost its product availability in domestic machineries market.

UNTR’s machinery sales volume trend

Source: Company, Bloomberg Finance L.P, DBSVI

The lack of new machinery availability means that miners could resort to the secondary market which sometimes entails higher risks, in view of the generally poor maintenance for used machineries amid a coal industry slump in 2012-2014. The listed miners, despite their strong financial position, are also reluctant to aggressively ramp up the intensity of their mining activities, such as boosting the strip ratio and volume output. After all, they have a prudent capital spending policy and intend to preserve their coal mining reserves for the future. We think the conservative stance of the well-established coal miners could reflect their primary goal of maintaining a strong financial performance, mainly profitability per ton, instead of embarking on volume expansion. This attests to the fact that the companies are aware as to what drives their share price performance, which is in line with our critical factor analysis. Note that our findings reveal that companies’ ability to deliver on the profitability front is highly correlated to share price performance. Hence, amid rising coal prices, miners could grow their revenue on the back of a conservative output expansion target as well as keep their strip ratio low. As a result, miners’ revenue could grow at double digits.

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Industry Focus

Thermal coal sector

Page 4

UNTR’s mining contracting activities trend

Source: Company, DBSVI What is priced in? We believe that the market has priced in a less rosy coal price outlook, i.e. the market believes the high coal prices will not be sustainable as potentially strong coal supply growth could lead to a lower supply-demand equilibrium, and hence the normalisation of coal prices. The market’s cautious stance on coal stocks is reflected in the sector’s undemanding valuation. Coal miners are still trading at a reasonable valuation of 9.0x-10.0x FY18F PE despite our earnings forecasts also take into account a more stable

profitability outlook for next year, as the higher-than-expected coal benchmark price performance YTD will be offset by higher fuel costs amid rising crude oil prices in 2018. We believe that the consensus view expects coal prices to trade at US$65-75 per ton in 2018. We think that the consensus price range is still conservative hence, a severe share price correction may not take place even if coal prices fall within this range. Next year, we still see the possibility that the miners will book better-than-expected earnings performance on slow cash cost expansion. The miners are now more careful in extracting their remaining coal reserves, reserves optimization means there could be positive earnings surprises for coal players moving forward vs. market expectations. Moreover, pro-longed bad weather conditions this year, which seems to continue in 1Q18, would also reduce the miners’ appetite to mine in higher strip concessions in view of the lower mining effectiveness - we could see the strip ratio and operating cash cost remaining at low levels.

PTBA’s forward PE band


ITMG’s forward PE band


ADRO’s forward PE band


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Monthly coal production volume (mn tons) ‐ LHS Strip ratio (X) ‐ RHS

Industry Focus

Thermal coal sector

Page 5

Key risks

Still no developments for domestic coal price regulation We do not account any meaningful progress to Indonesia’s cost-plus margin domestic coal pricing mechanism in our view toward the coal stocks. However, if it materialized, the cost plus margin mechanism may impact coal miners’ coal pricing and earnings performance, especially the miners that exposes to the domestic coal market such as PTBA. Our view is the new price regulations may not materialise in view of the accompanying challenges, such as the flexibility for miners to divert their sales volume to export markets which requires them to sidestep their domestic market obligation (DMO) requirement. Moreover, we think coal pricing regulations will face challenges in getting the approval from coal sellers, who believe that a fixed volume is an integral part of negotiations.

Impact of China’s NDRC actions on current coal price

trend We have yet to see any strong stance being adopted by the National Development and Reform Commission (NDRC), besides encouraging domestic coal miners to increase their supply to cope with the currently high coal prices and seasonally high domestic demand. The NDRC’s policies may affect global supply and demand dynamics, as China is the largest coal importer in the world. It also controls over 30% of global coal output. Higher-than-expected crude oil prices Higher fuel prices may weigh on coal miners’ margins next year especially if crude oil prices go above US$70/bbl, which is a tad higher than our FY18 forecast of US$65/bbl. Fuel costs account for around 25%-30% of coal miners’ operational cash cost.

Industry Focus

Thermal coal sector

Page 6

Company Guides

ed: CK / sa:MA, PY

BUY Last Traded Price ( 14 Nov 2017): Rp1,815 (JCI : 5,988.30) Price Target 12-mth: Rp2,500 (38% upside) Analyst William SIMADIPUTRA +62 2130034939 [email protected]

What’s New Raise TP to Rp2,500, maintain BUY rating

Our earnings are above consensus

We believe ADRO’s strong earnings outlook has not been priced in

Currently, it is trading at 8.3x FY18F PE

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 2,524 3,101 3,273 3,500 EBITDA 813 1,231 1,281 1,315 Pre-tax Profit 547 949 987 1,017 Net Profit 335 497 516 532 Net Pft (Pre Ex.) 335 497 516 532 Net Pft Gth (Pre-ex) (%) 119.1 48.3 3.9 3.1 EPS (Rp) 142 210 219 225 EPS Pre Ex. (Rp) 142 210 219 225 EPS Gth Pre Ex (%) 119 48 4 3 Diluted EPS (Rp) 142 210 219 225 Net DPS (Rp) 31.0 105 109 113 BV Per Share (Rp) 1,342 1,447 1,557 1,669 PE (X) 12.8 8.6 8.3 8.1 PE Pre Ex. (X) 12.8 8.6 8.3 8.1 P/Cash Flow (X) 6.3 5.8 5.0 5.7 EV/EBITDA (X) 6.5 4.1 3.7 3.4 Net Div Yield (%) 1.7 5.8 6.0 6.2 P/Book Value (X) 1.4 1.3 1.2 1.1 Net Debt/Equity (X) 0.1 0.0 CASH CASH ROAE (%) 11.1 15.1 14.5 14.0 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 203 203 203 Other Broker Recs: B: 25 S: 2 H: 1

Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P

Still on the rise

TP raised to Rp2,500, keep BUY call. Our higher TP comes on the heels of higher earnings forecasts – mainly thanks to ADRO’s stronger-than-expected YTD performance, particularly 3Q17. NPAT came in at US$150m (+73.3% y-o-y, +19.8% q-o-q) on the back of higher coal prices and a still low mining strip ratio. Our FY17F/18F earnings rise by 16%/12% to US$496m/ US$516m, as we lower our coal price discount (pushing our price assumption closer to our coal price benchmark forecast). Also, we lift our 2018 coal output by 2% to 55m tons. Where we differ: Strong earnings growth not priced in. We are confident that ADRO’s profitability will improve. Beyond stabilising coal prices, we believe that it has solid cost-saving strategies such as business line integration and conservative mining approach that had allowed it tide through various cycles of the coal industry. We also believe the earnings recovery trend has not been fully priced in at the current share price. Earnings momentum and steady coal price are share price catalysts in 4Q17. Besides the earnings recovery momentum that we believe will persist in 4Q17, steady coal prices also will support ADRO’s share price. Seasonal winter restocking from September-December may provide the upside potential for coal prices, relative to our Newcastle coal price benchmark forecast of US$65-70 per ton. As such, we believe ADRO’s earnings performance will top consensus expectations this year. Valuation:

We keep our BUY call with a DCF-based TP of Rp2,500 (WACC of 12.1% and terminal growth rate of 0%). This implies an FY17F PE of 11.4x, which is in line with its 5-year average. Key Risks to Our View:

2017 coal pricing and mining management. Our forecast is dependent on ADRO’s capability to secure favourable coal prices from buyers, and its efficiency strategy. At A Glance Issued Capital (m shrs) 31,986 Mkt. Cap (Rpm/US$m) 58,054,521 / 4,287 Major Shareholders (%) Adaro Strategic Investment 43.9 Thohir Garibaldi 6.5 Soeryadjaya Edwin 4.3

Free Float (%) 45.3 3m Avg. Daily Val (US$m) 4.9 ICB Industry : Basic Materials / Mining


Indonesia Company Guide

Adaro Energy Version 8 | Bloomberg: ADRO IJ | Reuters: ADRO.JK Refer to important disclosures at the end of this report

Page 8

Company Guide

Adaro Energy

WHAT’S NEW

Still on the rise

Earnings revision: Keeping our earnings forecasts above consensus.

Our FY17F/18F earnings rise by 16%/12% to US$496m/ US$516m, as we lower our coal price discount (pushing our price assumption closer to our coal price benchmark forecast). Moreover, we lift our 2018 coal output by 4% to 55m tons. Our new earnings forecasts are still above consensus’. We believe that consensus has not taken into account the positive impact of its spot pricing sale on its earnings performance. ADRO’s coal pricing benefited from higher-than-expected coal benchmark prices vs. our forecast. As around 4% of 9M17 coal sales volume was sold under spot pricing, this has helped boost ADRO’s YTD revenue and earnings. We adjust our coal ASP to bake in the higher-than-expected YTD revenue. Our FY17/18 new ASP at US$54.6/US$56 per ton are 6%/4% higher than out previous forecast. We believe our coal price assumption is reasonable as the still high coal benchmark prices can have an impact on average selling price in 4Q17 and 2018. Moreover, we also nudge up our FY18F/19F coal output target by 2%/3% to 55m/58.8m tons to account for the still high coal prices, which give ADRO the room to raise its coal output. Moreover, the abundant coal reserves on hand means that ADRO could maintain its operational flexibility edge and keep its cash cost per ton in check – thus maintaining its margins. We bake in ADRO‘s ongoing operational flexibility by changing our cash cost ex. royalty assumption to US$29 per ton in FY18 and US$30 per ton in FY19, backed by its steady mining strip ratio and mining contracting fees. The still low fuel prices will also help boost ADRO’s cash cost performance next year. 3Q17 performance: Above our and consensus forecasts.

ADRO delivered a solid earnings performance in 3Q17, thanks to steady YTD coal prices and its efficiency-enhancement efforts. Net profit after tax (NPAT) came in at Rp150bn (+73.3% y-o-y, +19.8% q-o-q), well above our and consensus forecasts.

Thanks to the solid coal ASP of US$58.8 per ton (+40% y-o-y, +0.9% q-o-q) and steady coal sales volume of 14.2m tons (+6.8% y-o-y, +7.6% q-o-q), ADRO’s 3Q17 revenue surged to

US$890m (+47.1% y-o-y, +8.1% q-o-q), which is above our and consensus forecasts.

As ADRO’s costs were stable in 3Q17, the higher ASP had a huge impact on its y-o-y earnings performance. The impressive profit performance was supported by its sound mining activity management, i.e. its ability to keep the operating cash cost per ton low. Its strip ratio expanded to 5.0x in 3Q17, on track to meet management’s FY17 guidance of 4.85x, after falling short of the guidance in 1H17. The higher strip ratio was accompanied by a higher estimated cash cost per ton of US$25.5 per ton in 3Q17 (2Q17 : US$24 per ton), which is still within our expectation.

NEW TP: TP raised to Rp2,500, maintain BUY rating

Our DCF-based TP rises as we bump up our earnings forecasts. Our TP implies an FY18F PE of 11.4x, which we believe is undemanding considering its solid cost control and steady coal benchmark price performance outlook in 4Q17. These factors bode well for ADRO’s coal pricing contract negotiations for commercial year 2018. ADRO remains one of our top picks in the coal sector.

Quarterly production and strip ratio trend


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Page 9

Company Guide

Adaro Energy

Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq

Revenue 603 823 890 47.7 8.1

Cost of Goods Sold (440) (508) (563) 28.1 10.9

Gross Profit 163 315 327 100.6 3.7

Other Oper. (Exp)/Inc (17.1) (57.4) (44.4) 159.1 (22.7)

Operating Profit 146 258 282 93.7 9.6

Other Non Opg (Exp)/Inc (11.0) (8.1) (6.3) 42.6 (21.6)

Net Interest (Exp)/Inc 0.0 0.0 0.0 nm nm

Pre-tax Profit 135 250 276 104.9 10.6

Tax (46.9) (111) (111) 137.3 0.5

Minority Interest (1.3) (13.7) (14.8) (1,035.0) 7.9

Net Profit 86.6 125 150 73.3 19.8

Net profit bef Except. 86.6 125 150 73.3 19.8

EBITDA 227 350 380 67.4 8.6

Margins (%)

Gross Margins 27.0 38.3 36.7

Opg Profit Margins 24.2 31.3 31.7

Net Profit Margins 14.4 15.2 16.9

Source of all data: Company, DBSVI

Earnings revision summary

2017F 2018F 2019F

Old New Changes Old New Changes Old New Changes

Revenue (US$ m)

2,945

3,101 5% 3,104 3,273 5% 3,281 3,500 7%

Gross profit (US$ m)

1,019

1,154 13% 1,090 1,206 11% 1,111 1,247 12%

Operating profit (US$ m)

857

983 15% 920 1,026 12% 931 1,054 13%

EBITDA (US$ m)

1,105

1,231 11% 1,175 1,281 9% 1,192 1,316 10%

Net profit (US$ m)

429

496 16% 459 516 12% 466 532 14%

Production (m tons)

53.5

53.5 0% 54 55.06 2% 57 58.8 3%

ASP (US$ per ton)

51.7

54.6 6% 54 56 4% 53.9 55.9 4%

Cash cost per ton (US$ per ton)

27.6

27.6 0% 29 29 0% 29.56 30 0%

SG&A % sales -6% -6% 0% -6% -6% 0% -6% -6% 0%

Source : DBSVI

Page 10

Company Guide

Adaro Energy

CRITICAL DATA POINTS TO WATCH

Critical Factors

Still relatively flat production outlook. We assume coal output growth to be relatively flat over FY16-18F, premised on ADRO’s defensive strategy of prioritising profitability over expanding production. The Tutupan and Paringin concessions will remain the largest contributors (48m tons), accounting for 96% of ADRO's coal production. Improved coal price outlook. Coal ASP will improve alongside the better Newcastle coal benchmark price outlook. We expect ASP to climb to US$52 per ton in FY17 before rising further to US$54 per ton in FY18, in line with our higher coal benchmark price forecast of US$65 per ton next year. A higher ASP for coal will allow ADRO to expand its profitability and deliver better earnings growth. Lower cash cost on better operational efficiency. We have assumed a slightly lower cash cost of U$33.6 per ton for FY17, while conservatively imputing similar mining contracting rates for this year. We have factored in lower fuel cost in our cash cost estimate. ADRO’s cost-saving measures would help boost its earnings. A lower fuel cost will also help ADRO reduce cash cost per ton. ADRO’s fuel cost reached US$0.7/litre last year and, at current coal prices, fuel cost is US$0.5 per litre, half of its 5-year average. Ongoing refinancing efforts to reduce cost of debt. ADRO will continue to reduce borrowing cost via refinancing. Its interest dropped by 16% in FY16 to US$41m. ADRO's access to competitive financing terms bodes well for the company; it recently refinanced its existing debt with Adaro Indonesia (involving a US$1bn loan facility) at a lower borrowing cost.

Sales volume (m tons)

ASP (US$/ton)

Cash cost/ ton (US$/ton)

EBITDA margin (%)

Interest expenses (US$mn)


Page 11

Company Guide

Adaro Energy

Appendix 1: A look at Company's listed history – what drives its share price?

Adaro’s share price vs. operating margin performance Remarks

ADRO’s share price has been tracking its profitability since 2009. Profitability contraction, despite the seasonal high in 1Q and low in 4Q over the past five years due to lacklustre coal prices, has weighed on ADRO’s share price. ADRO then initiated an intensive efficiency-enhancement programme in 1H16, resulting in a strong performance in 2H16, amid high coal prices.

*share price in US dollar currency Adaro’s share price performance vs. JCI since January 2009

Remarks

The chart here shows

that the market has not

really priced in a scenario

of a coal price recovery,

as the share price has

been underperforming

the index since January

2009. ADRO’s share

price tend to outperform

when coal prices are

bullish, as seen in 1Q09-

1Q12.

Adaro’s share price performance vs. coal price trend since January 2009 Remarks Share price Coal price

Historically, ADRO’s

share price has tracked

the Newcastle coal price

benchmark and we

believe the trend will

persist, given that coal

price is a significant

driver of ADRO’s profit.

Beyond ADRO’s earnings

recovery, a steady coal

price outlook in 2H17 on

seasonal winter restocking

will support ADRO’s share

performance in 2H17.

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ADRO Coal price

Share price downtrend on profitability contraction era due to bearish coal price cycle

Market understand seasonal strong profitability in 1Q of the year

Sustaining strong profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16

The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist

Adaro underperformed the index during the prolonged coal price downtrend since 2012.

Page 12

Company Guide

Adaro Energy

Balance Sheet:

Deleveraging on progress. ADRO will continue to deleverage its balance sheet in the absence of plans to acquire new coal assets. However, its foray into power plants means that ADRO cannot fully be a debt-free coal miner because it would need to rely on third-party financing to supplement weak internal cashflow generation. Modest capex outlook, ample reserves. We forecast ADRO will spend US$200m per year on capex in 2017-2018, mainly to expand output at existing concessions, for its downstream power plant project, and the maintenance of machinery. Our capex assumption is in line with management’s new guidance for FY17. ADRO has 1.1bn tons of coal reserves, sufficient to last 20 years at the current extraction rate. As such, ADRO can focus on the capex needs of its coking coal project. Share Price Drivers:

Better profitability leads to a higher share price. ADRO’s share price tracks its profitability outlook. A better profitability outlook leads to a higher share price and vice versa. ADRO successfully boosted its profitability in 2016, getting close to the levels prior to the coal price downtrend in 2015. Key Risks:

Coal price. The price of coal is the key upside/downside risk for coal miners, as they are price takers with minimal pricing power. Despite the fact that the impact of higher or lower coal prices is not fully reflected in ADRO’s quarterly earnings, the coal price sentiment can affect ADRO’s stock price. Execution risk. If ADRO fails to meet its targeted production volume and cash cost per ton, ADRO could miss our earnings estimate. Company Background

ADRO is Indonesia's second-largest coal producer. It sells 75% of its production to the export market and the rest in the domestic market. It has subsidiaries that operate in the mining contracting, barging and ship-loading, and water-tolling businesses.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Page 13

Company Guide

Adaro Energy

Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Sales volume (m tons) 51.4 52.6 53.5 55.1 58.8 ASP (US$/ton) 46.9 43.4 54.6 55.9 55.9 Cash cost/ ton (US$/ton) 39.2 35.8 33.6 34.0 34.0 EBITDA margin (%) 27.2 35.4 39.7 39.1 37.6 Interest expenses (US$mn) 48.9 40.9 33.7 38.9 37.2

Segmental Breakdown

FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (US$m) Coal Mining 2,492 2,347 2,921 3,078 3,289 Mining Contracting 123 111 145 160 176 Others 70.4 66.0 35.0 35.0 35.0 Total 2,685 2,524 3,101 3,273 3,500

Income Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 2,685 2,524 3,101 3,273 3,500 Cost of Goods Sold (2,141) (1,839) (1,948) (2,067) (2,254) Gross Profit 543 685 1,154 1,206 1,247 Other Opng (Exp)/Inc (211) (97.7) (171) (180) (193) Operating Profit 332 588 983 1,026 1,054 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc (3.0) (0.2) (0.2) (0.2) (0.3) Net Interest (Exp)/Inc (48.9) (40.9) (33.7) (38.9) (37.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 280 547 949 987 1,017 Tax (129) (206) (446) (464) (478) Minority Interest 1.40 (6.1) (6.7) (7.3) (7.3) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 153 335 497 516 532 Net Profit before Except. 153 335 497 516 532 EBITDA 550 813 1,231 1,281 1,315 Growth Revenue Gth (%) (19.3) (6.0) 22.9 5.5 7.0 EBITDA Gth (%) (17.3) 47.8 51.4 4.0 2.7 Opg Profit Gth (%) (32.7) 76.9 67.3 4.3 2.7 Net Profit Gth (Pre-ex) (%) (14.2) 119.1 48.3 3.9 3.1 Margins & Ratio Gross Margins (%) 20.2 27.2 37.2 36.8 35.6 Opg Profit Margin (%) 12.4 23.3 31.7 31.3 30.1 Net Profit Margin (%) 5.7 13.3 16.0 15.8 15.2 ROAE (%) 5.4 11.1 15.1 14.5 14.0 ROA (%) 2.5 5.4 7.4 7.4 7.4 ROCE (%) 3.1 6.3 8.5 8.5 8.5 Div Payout Ratio (%) 49.4 21.9 50.0 50.0 50.0 Net Interest Cover (x) 6.8 14.4 29.1 26.4 28.3


Page 14

Company Guide

Adaro Energy


FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 603 746 727 823 890 Cost of Goods Sold (440) (526) (509) (508) (563) Gross Profit 163 220 218 315 327 Other Oper. (Exp)/Inc (17.1) (14.3) (28.6) (57.4) (44.4) Operating Profit 146 205 189 258 282 Other Non Opg (Exp)/Inc (11.0) (8.2) (7.4) (8.1) (6.3) Net Interest (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 135 197 182 250 276 Tax (46.9) (67.4) (71.6) (111) (111) Minority Interest (1.3) (3.8) (12.8) (13.7) (14.8) Net Profit 86.6 126 97.1 125 150 Net profit bef Except. 86.6 126 97.1 125 150 EBITDA 227 268 276 350 380 Growth Revenue Gth (%) 2.2 23.8 (2.6) 13.2 8.1 EBITDA Gth (%) 10.2 18.1 3.0 26.8 8.6 Opg Profit Gth (%) 22.2 40.9 (8.0) 36.3 9.6 Net Profit Gth (Pre-ex) (%) 38.8 45.5 (22.9) 28.9 19.8 Margins Gross Margins (%) 27.0 29.5 29.9 38.3 36.7 Opg Profit Margins (%) 24.2 27.5 26.0 31.3 31.7 Net Profit Margins (%) 14.4 16.9 13.4 15.2 16.9

Balance Sheet (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 3,494 3,981 3,933 3,878 3,816 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 1,372 949 951 954 956 Cash & ST Invts 680 1,098 1,212 1,566 1,798 Inventory 72.8 73.4 45.1 47.9 52.2 Debtors 196 301 425 380 480 Other Current Assets 122 142 246 255 265 Total Assets 5,937 6,543 6,812 7,080 7,368 ST Debt 123 154 56.3 56.3 56.3 Creditor 196 208 267 283 309 Other Current Liab 135 283 297 312 328 LT Debt 1,384 1,280 1,293 1,239 1,184 Other LT Liabilities 768 811 811 811 811 Shareholder’s Equity 2,844 3,167 3,416 3,673 3,939 Minority Interests 487 639 671 705 740 Total Cap. & Liab. 5,937 6,543 6,812 7,080 7,368 Non-Cash Wkg. Capital 58.5 24.9 152 87.7 160 Net Cash/(Debt) (826) (337) (137) 271 558 Debtors Turn (avg days) 32.7 35.9 42.7 44.9 44.8 Creditors Turn (avg days) 52.0 45.7 51.0 55.4 54.2 Inventory Turn (avg days) 16.1 16.5 12.7 9.4 9.2 Asset Turnover (x) 0.4 0.4 0.5 0.5 0.5 Current Ratio (x) 2.4 2.5 3.1 3.5 3.7 Quick Ratio (x) 1.9 2.2 2.6 3.0 3.3 Net Debt/Equity (X) 0.2 0.1 0.0 CASH CASH Net Debt/Equity ex MI (X) 0.3 0.1 0.0 CASH CASH Capex to Debt (%) (3.1) 49.7 14.8 15.4 16.1 Z-Score (X) 2.1 2.2 2.4 2.6 2.6


Page 15

Company Guide

Adaro Energy

Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 280 547 949 987 1,017 Dep. & Amort. 221 226 248 255 262 Tax Paid (129) (206) (446) (464) (478) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (88.0) (94.2) (36.9) 58.4 (78.2) Other Operating CF (3.1) 208 25.3 26.2 27.9 Net Operating CF 281 681 740 863 750 Capital Exp.(net) 47.1 (712) (200) (200) (200) Other Invts.(net) 68.2 281 (2.3) (2.5) (2.6) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 8.90 122 (104) (9.4) (10.1) Net Investing CF 124 (309) (306) (212) (213) Div Paid (75.5) (73.2) (248) (258) (266) Chg in Gross Debt (374) (72.2) (84.6) (54.6) (54.6) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (21.0) 192 14.2 14.9 15.6 Net Financing CF (471) 46.2 (319) (298) (305) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (65.2) 418 115 353 233 Opg CFPS (Rp) 157 328 329 341 351 Free CFPS (Rp) 139 (13.5) 229 281 233


Target Price & Ratings History

Source: DBSVI

Analyst: William SIMADIPUTRA

ed: JS / sa:MA, PY


What’s New Raising TP to Rp25,000; maintain BUY rating

Sustained strong cash margins should be a share price catalyst

Raised our FY17/18F earnings

Barring M&As, dividend yield stays > 7%

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 1,368 1,703 1,842 1,942 EBITDA 272 380 400 423 Pre-tax Profit 192 320 339 361 Net Profit 131 234 247 263 Net Pft (Pre Ex.) 131 234 247 263 Net Pft Gth (Pre-ex) (%) 107.1 78.7 5.9 6.4 EPS (Rp) 1,568 2,802 2,968 3,157 EPS Pre Ex. (Rp) 1,568 2,802 2,968 3,157 EPS Gth Pre Ex (%) 107 79 6 6 Diluted EPS (Rp) 1,568 2,802 2,968 3,157 Net DPS (Rp) 498 1,961 2,078 2,210 BV Per Share (Rp) 10,874 11,714 12,605 13,552 PE (X) 13.1 7.3 6.9 6.5 PE Pre Ex. (X) 13.1 7.3 6.9 6.5 P/Cash Flow (X) 7.6 5.3 5.7 5.4 EV/EBITDA (X) 5.1 3.3 2.9 2.6 Net Div Yield (%) 2.4 9.5 10.1 10.7 P/Book Value (X) 1.9 1.8 1.6 1.5 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 15.0 24.8 24.4 24.1 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 2,643 2,575 2,521 Other Broker Recs: B: 19 S: 0 H: 7


Upside risk on coal reserves life

Raised TP to Rp25,000, maintain BUY. Indo Tambangraya Megah (ITMG)’s earnings rebounded strongly by 52.3% q-o-q in 3Q17 to US$107m (+102% y-o-y), ahead our and consensus forecast. ASP expanded by 8% q-o-q to US$73.9 per ton (+48% y-o-y) in 3Q17, and coupled with 3% lower average COGS/ton (excl. Royalty) at US$42.2/ton, led to the strong jump in earnings despite the steep rise in average strip ratio to 13.0x. We raised our FY17/18F earnings by 38%/20% to account the stronger than expected coal ASP in the period, better cost outlook as a result of its cost optimisation program, offset by the higher strip ratio. Where we differ: we are forecasting positive earnings growth in 2018 vs. flat estimate by consensus. We believe that ITMG’s earnings has not peaked yet given the steady coal price performance and there is room for output expansion. We reiterate our positive stance on its long-term profitability given its ability to maintain a relatively healthy cash margin despite a higher strip ratio. Moreover, higher coal prices also provides upside risk to ITMG’s reserves life, earnings growth and share price’s valuation. Positive catalyst: consistent earnings growth and attractive dividend yield. ITMG’s dividend yield remains the highest among its peers. We think ITMG will distribute 70% of its FY18 profit, translating to a dividend yield of 9.6% in 2018. Valuation:

We keep our BUY call with a DCF-based TP of Rp25,000 (WACC of 12.1% and terminal growth rate of 0%). This implies an FY17F PE of 8.7x,which is still below with its 5-year average PE multiple of 10.7x. Key Risks to Our View:

2017 coal pricing and mining management. Our forecast is dependent on ITMG capability to secure favourable coal prices from buyers, and its efficiency strategy. At A Glance Issued Capital (m shrs) 1,130 Mkt. Cap (Rpm/US$m) 23,248,207 / 1,717 Major Shareholders (%) Adaro Strategic Investment 43.9 Thohir Garibaldi 6.5 Soeryadjaya Edwin 4.3

Free Float (%) 45.3 3m Avg. Daily Val (US$m) 2.1 ICB Industry : Basic Materials / Mining



Indo Tambangraya Megah Version 8 | Bloomberg: ITMG IJ | Reuters: ITMG.JK Refer to important disclosures at the end of this report

Page 17

Company Guide

Indo Tambangraya Megah

WHAT’S NEW

Upside risk on coal reserves life

3Q17 earnings : Above our expectation.

Earnings rebounded strongly by 52.3% q-o-q in 3Q17 to US$107m (+102% y-o-y), ahead our and consensus forecast. ASP expanded by 8% q-o-q to US$73.9 per ton (+48% y-o-y) in 3Q17, and coupled with 3% lower average COGS/ton (excl. Royalty) at US$42.2/ton led to the strong jump in earnings despite the steep rise in average strip ratio to 13.0x. ITMG delivered a strong financial performance despite the higher strip ratio trend. We see the trend as positive for ITMG’s long term reserves life performance, as the higher strip ratio trend means there are more mineable coal reserves going forward. ITMG’s reported estimated reserves is still at 8 years, however, looking at its high strip ratio outlook and current coal price trends, we believe ITMG has operational flexibility, as seen in its strong performance in 3Q17, which translate into higher mineable coal reserves. Moreover, low fuel prices helped ITMG to keep its cash cost per ton low despite the higher strip ratio trend in 3Q17. Fuel cost accounts for approximately 30% of ITMG’s operational cash cost ex. Royalty. Going forward, ITMG is evaluating several ways to mitigate the rising fuel cost such as purchasing its own fuel at more competitive prices. We estimate its own sourcing fuel strategy can reduce the cost per litre by 10%, or it could put in place a hedging strategy. Earnings revision: Raising earnings forecast by 38%/20% in FY17/18. We raised our FY17/18F earnings by 38%/20% to account for the stronger coal ASP outlook in the period, despite the higher strip ratio application. Our earnings were slightly above consensus as we believe ITMG would be able to maintain strong margins despite the higher fuel cost, thanks to emerging operational flexibility given the higher coal price trend Higher ASP signals strong coal supply and demand trend. ITMG realised stronger ASPs compared to our estimate, which implies stronger off take from shorter-term contract buyers, or buyers were keen to pay the spot price. We think this is a good sign that supply and demand trends are still healthy.

Maintain BUY with new TP Rp25,000 based on DCF

Our higher TP reflects the higher earnings and free cash flows for next year – amid the stable capital expenditure outlook. We still assume a conservative long term reserves life of 8 years in our forecast despite coal price trading at US$90 per ton. This means that ITMG has better operational flexibility and mineable coal reserves; upside risk to our TP. Our TP implies FY18F P/E of 8.7x.

Coal pricing trend (US$/ton)


Strip ratio trend (X)


-40%

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2011 2012 2013 2014 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

ITMG ASP (US$ per ton) - LHS Newcastle coal index (US$ per ton)-LHS

Discount/premium to benchmark price -RHS

13.112.2

1110

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9.410.1

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Strip ratio (X)

Page 18

Company Guide



FY Dec 3Q2016 2Q2017 3Q2017 % chg yoy % chg qoq

Revenue 349 381 415 18.9 9.0

Cost of Goods Sold (272) (283) (281) 3.3 (0.9)

Gross Profit 77.3 97.6 134 73.9 37.6

Other Oper. (Exp)/Inc (30.7) (27.1) (26.9) (12.4) (0.6)

Operating Profit 46.5 70.5 107 130.9 52.4

Other Non Opg (Exp)/Inc (1.3) (0.4) (17.1) nm nm

Net Interest (Exp)/Inc 0.30 0.60 0.70 151.5 17.1

Pre-tax Profit 45.5 70.8 91.1 100.2 28.7

Tax (12.4) (22.6) (24.2) 95.3 6.9

Net Profit 33.1 48.1 66.9 102.0 39.0

Net profit bef Except. 33.1 48.1 66.9 102.0 39.0

EBITDA 59.0 70.5 107 82.0 52.3

Margins (%)

Gross Margins 22.1 25.6 32.4

Opg Profit Margins 13.3 18.5 25.9

Net Profit Margins 9.5 12.6 16.1

Source of all data: Company, DBSVI

Earnings revision summary

2017F 2018F 2019F

Old New Changes Old New Changes Old New Changes

Revenue (US$m) 1,578 1,703 8% 1,707 1,842 8% 1,800 1,942 8%

Gross profit (US$m) 354 452 28% 397 463 17% 422 492 17%

EBITDA (US$m) 292 380 30% 343 400 17% 363 423 17%

Net profit (US$m) 170 234 38% 206 247 20% 219 263 20%

Production volume (m ton) 26.0 26.0 0% 28.0 28.0 0% 29.5 29.5 0%

ASP (US$ per ton) 62.0 67.0 8% 62.0 67.0 8% 62.0 67.0 8%

Cash cost per ton (US$/ton) 36.4 36.8 1% 36.2 38.0 5% 36.2 38.00 5%

Source : Company, DBSVI

Page 19

Company Guide



Critical Factors

Earnings to grow by 79% in FY17, on higher coal ASP. We forecast earnings will grow by 79% y-o-y to US$234m in FY17 before growing further by 6% y-o-y to US$247m in FY18. The higher revenue and earnings in FY17 would be mainly driven by the better coal ASP outlook, coupled with a higher cash margin per ton, despite ITMG's flat production and sales volume growth. Single digit coal output growth. In line with guidance and the group’s focus on profitability rather than production, we assume flat coal production and sales volume of 26m tons in FY17, before growing by 8% y-o-y to 28m tons in FY18. As ITMG’s mines have a remaining life of eight years, ITMG prefers to maintain a flat production volume to ensure stable profitability. We assume ITMG's strip ratio will increase to 10.0x in 2017 vs. 8.6x in 2016 given the brighter coal ASP outlook – hence, ITMG should be able to mine coal in the more pricey concessions (in terms of operational cost). ASP recovery underway. We forecast the benchmark coal price will remain at US$65 per ton beyond 2017. This will affect ITMG’s coal pricing ahead. We assume ASP of US$67 per ton in 2017 and 2018. Our ASP assumption implies a 3% premium to our forecast benchmark price. Higher cash cost on higher strip ratio. Cash cost will increase to US$36.8 per ton in FY17 due to a better strip ratio outlook and higher fuel cost. We also assume fuel cost would increase to US$0.7 per litre (+49% y-o-y) in FY18, on the back of a improved crude oil price outlook. However, we see limited room for mining contracting fees to be renegotiated lower given ITMG’s flat volume growth. Miners with higher strip ratios will benefit from lower fuel prices. Miners, including ITMG, will be the largest beneficiary of lower fuel cost given their high usage of machineries, in our view. A low crude price environment has a positive impact on ITMG’s profitability, as seen last year.

Sales volume (m tons)

Avg selling price (US$/ton)

Cash cost (US$/ton)

Fuel cost (US$/liter)

EBITDA margin (%)


Page 20

Company Guide


Appendix 1: A look at Company's listed history – what drives its share price? ITMG’s share price vs. operating margin performance Remarks

ITMG’s share price weakness has tracked its profitability and earnings downtrend in tandem with the coal price downcycle that arose from prolonged oversupply conditions in the last five years. Despite its profitability improvement since 2016, its share price has still lagged behind and underperformed the JCI index (see next chart).

*share price in US dollar currency ITMG’s share price performance vs. JCI since January 2009

Remarks

The chart here shows the market has not really priced in the scenario of a coal price recovery, as ADRO’s share price has continued to underperform relative to the JCI index since January 2009. ADRO’s share price tends to outperform during coal price upcycles, as seen in 1Q09-1Q12.

ITMG’s share price performance vs. coal price trend since January 2009 Remarks Share price Coal price

Source: Bloomberg Finance L.P., company, DBSVI

Historically, ADRO’s share price has tracked the Newcastle coal price benchmark trend. We believe the trend will persist given coal price is a significant driver for ADRO’s share price performance. Apart from this, ADRO’s earnings recovery and the steady coal price outlook in 2H17 on seasonal winter restocking will help support ADRO’s share price performance in 2H17.

0

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PX_LAST OPER_MARGIN

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ITMG JCI

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ITMG ‐ RHS Coal price

Share price downtrend on profitability contraction era due to bearish coal price cycle

Sustaining strong profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16

ITMG underperformed the index during the prolonged coal price downtrend since 2012. The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist

OPM (%) Share px performance (X)

Page 21

Company Guide


Balance Sheet:

Net cash position. ITMG’s has a net cash balance sheet as a strategy to cope with the challenging coal price environment. Its net cash position also means that ITMG will be able to pursue acquisition of reserves when opportunities present.

Share Price Drivers:

Stock valuation had de-rated on bleak industry outlook in the past three years. ITMG’s share price has de-rated because of concerns over its depleting reserves, barring any potential sizeable acquisitions ahead. Its limited reserves could also hurt earnings if it needs to cut output further, thus restricting its ability to lower its strip ratio.

Key Risks:

Drop in coal prices. Coal miners are price-takers, with little pricing power. Furthermore, the pricing outlook is more challenging now, given the abundant supply and slower coal demand growth due to environmental concerns. Operational risk. If ITMG fails to secure meaningful coal reserves in the future, it may have to halt operations. Moreover, the efficiency-focused strategy may not lead to meaningful reductions in cash cost. Profitability risk. We have assumed that ITMG would maintain its cash margin by lowering its production. It is possible that ITMG may need to further cut its coal production volume if the remaining profitable concessions do not meet their expectations. Company Background

ITMG is one of the largest coal mining companies owned by Banpu. The scope of the business includes coal mining operation, processing and logistics. ITMG owns majority stares in seven subsidiaries and operates six mining concessions in Kalimantan Island.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


Page 22

Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Sales volume (m tons) 25.0 25.7 26.0 28.0 29.5 Avg selling price (US$/ton) 63.6 56.6 67.0 67.0 67.0 Cash cost (US$/ton) 38.2 35.6 36.8 38.0 38.0 Fuel cost (US$/liter) 0.70 0.50 0.70 0.70 0.70 EBITDA margin (%) 12.6 19.9 22.3 21.7 21.8

Income Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 1,589 1,368 1,703 1,842 1,942 Cost of Goods Sold (1,239) (1,037) (1,251) (1,378) (1,450) Gross Profit 350 331 452 464 492 Other Opng (Exp)/Inc (157) (122) (136) (129) (136) Operating Profit 194 209 316 335 356 Other Non Opg (Exp)/Inc (57.4) (18.0) 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc 3.30 1.50 4.40 4.40 4.40 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 139 192 320 339 361 Tax (76.3) (61.3) (86.4) (91.5) (97.3) Minority Interest 0.0 0.0 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 63.1 131 234 247 263 Net Profit before Except. 63.1 131 234 247 263 EBITDA 200 272 380 400 423 Growth Revenue Gth (%) (18.2) (14.0) 24.5 8.2 5.5 EBITDA Gth (%) (35.5) 35.7 39.8 5.4 5.7 Opg Profit Gth (%) (18.0) 7.7 51.3 6.0 6.4 Net Profit Gth (Pre-ex) (%) (68.5) 107.1 78.7 5.9 6.4 Margins & Ratio Gross Margins (%) 22.0 24.2 26.5 25.2 25.3 Opg Profit Margin (%) 12.2 15.3 18.5 18.2 18.3 Net Profit Margin (%) 4.0 9.6 13.7 13.4 13.6 ROAE (%) 7.3 15.0 24.8 24.4 24.1 ROA (%) 5.1 10.9 18.2 17.6 17.5 ROCE (%) 9.5 15.2 22.9 22.6 22.4 Div Payout Ratio (%) 63.1 65.7 125.1 74.2 74.5 Net Interest Cover (x) NM NM NM NM NM


Page 23

Company Guide



FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 349 409 368 381 415 Cost of Goods Sold (272) (272) (253) (283) (281) Gross Profit 77.3 137 115 97.6 134 Other Oper. (Exp)/Inc (30.7) (33.5) (25.8) (27.1) (26.9) Operating Profit 46.5 104 89.2 70.5 107 Other Non Opg (Exp)/Inc (1.3) (11.1) (1.5) (0.4) (17.1) Net Interest (Exp)/Inc 0.30 0.60 0.70 0.60 0.70 Pre-tax Profit 45.5 93.0 88.3 70.8 91.1 Tax (12.4) (31.8) (31.2) (22.6) (24.2) Net Profit 33.1 61.1 57.2 48.1 66.9 Net profit bef Except. 33.1 61.1 57.2 48.1 66.9 EBITDA 59.0 104 89.2 70.5 107 Growth Revenue Gth (%) 25.4 17.2 (10.1) 3.5 9.0 EBITDA Gth (%) 84.4 75.5 (13.9) (20.9) 52.3 Opg Profit Gth (%) 132.0 122.5 (13.9) (20.9) 52.4 Net Profit Gth (Pre-ex) (%) 146.1 84.6 (6.5) (15.8) 39.0 Margins Gross Margins (%) 22.1 33.5 31.2 25.6 32.4 Opg Profit Margins (%) 13.3 25.3 24.2 18.5 25.9 Net Profit Margins (%) 9.5 14.9 15.5 12.6 16.1

Balance Sheet (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 255 224 192 167 140 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 412 447 469 493 517 Cash & ST Invts 269 327 454 537 625 Inventory 117 62.0 62.3 68.6 72.2 Debtors 119 125 155 167 176 Other Current Assets 8.40 23.7 24.9 26.1 27.4 Total Assets 1,179 1,209 1,357 1,458 1,558 ST Debt 0.0 0.0 0.0 0.0 0.0 Creditor 121 94.0 161 178 187 Other Current Liab 164 145 152 160 168 LT Debt 0.0 0.0 0.0 0.0 0.0 Other LT Liabilities 59.5 63.5 66.7 70.0 73.5 Shareholder’s Equity 835 906 977 1,051 1,130 Minority Interests 0.0 0.0 0.0 0.0 0.0 Total Cap. & Liab. 1,179 1,209 1,357 1,458 1,558 Non-Cash Wkg. Capital (39.8) (27.9) (71.7) (75.5) (78.7) Net Cash/(Debt) 269 327 454 537 625 Debtors Turn (avg days) 33.2 32.6 30.0 31.9 32.3 Creditors Turn (avg days) 44.5 40.2 39.3 47.2 48.1 Inventory Turn (avg days) 41.5 33.6 19.1 18.2 18.6 Asset Turnover (x) 1.3 1.1 1.3 1.3 1.3 Current Ratio (x) 1.8 2.3 2.2 2.4 2.5 Quick Ratio (x) 1.4 1.9 1.9 2.1 2.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) N/A N/A N/A N/A N/A Z-Score (X) 6.0 6.6 5.9 5.9 5.8


Page 24

Company Guide


Cash Flow Statement (US$m)

FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 139 192 320 339 361 Dep. & Amort. 64.0 63.0 64.1 65.4 66.7 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 53.9 6.90 36.5 (3.8) (4.7) Other Operating CF (66.2) (36.8) (95.6) (101) (108) Net Operating CF 191 225 325 299 315 Capital Exp.(net) (32.9) (32.2) (32.2) (40.0) (40.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 30.5 (60.1) (13.1) (13.8) (14.5) Net Investing CF (2.4) (92.3) (45.3) (53.8) (54.5) Div Paid (126) (41.5) (164) (173) (184) Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (19.9) (33.0) 10.4 10.9 11.5 Net Financing CF (146) (74.5) (153) (162) (173) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 42.5 58.4 127 83.3 87.8 Opg CFPS (Rp) 1,647 2,618 3,460 3,637 3,836 Free CFPS (Rp) 1,898 2,315 3,512 3,112 3,299



Source: DBSVI


ed: CK / sa:MA, PY


What’s New Maintain BUY with TP of Rp16,900

Trading at low FY18 PE of 6.8x despite strong earnings performance

Stable performance can act as re-rating catalyst

Expecting a strong finish in 4Q17

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 14,059 16,875 18,742 20,451 EBITDA 2,948 4,298 4,694 5,720 Pre-tax Profit 2,734 4,315 4,791 5,910 Net Profit 2,006 3,235 3,592 4,430 Net Pft (Pre Ex.) 2,006 3,235 3,592 4,430 Net Pft Gth (Pre-ex) (%) (1.5) 61.2 11.0 23.3 EPS (Rp) 871 1,404 1,559 1,923 EPS Pre Ex. (Rp) 871 1,404 1,559 1,923 EPS Gth Pre Ex (%) (1) 61 11 23 Diluted EPS (Rp) 871 1,404 1,559 1,923 Net DPS (Rp) 361 632 701 865 BV Per Share (Rp) 4,523 5,295 6,152 7,210 PE (X) 13.6 8.4 7.6 6.1 PE Pre Ex. (X) 13.6 8.4 7.6 6.1 P/Cash Flow (X) 18.6 6.7 7.6 6.1 EV/EBITDA (X) 8.9 5.9 5.2 4.0 Net Div Yield (%) 3.1 5.4 5.9 7.3 P/Book Value (X) 2.6 2.2 1.9 1.6 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 20.5 28.6 27.2 28.8 Earnings Rev (%): 0 0 0 Consensus EPS (Rp): 1,498 1,481 1,437 Other Broker Recs: B: 23 S: 1 H: 3


Attractive valuation on the table Maintain BUY with TP of Rp16,900. PTBA’s share price performance is set to close the gap with its peers ADRO and ITMG. Its current share price provides an attractive potential upside of 40% to our TP, coupled with a dividend yield of 6%. We believe PTBA’s share price correction, in the wake of the announcement of Indonesia’s domestic coal-plus margin pricing mechanism in Oct, is overdone. It is trading at an attractive 6.8x FY18F PE, despite its strong YTD earnings performance. We think the market has fully priced in the negative announcement even in the absence of any follow-up action and clarification.

Where we differ: We are bullish on PTBA’s efficiency programme. Our earnings forecast is above consensus, as we think that PTBA’s low mining contracting expenses will boost its profitability, thanks to its stricter stance in negotiating with third-party mining contractors and plans to expand its in-house mining contractor operations. PTBA aims to achieve a 50:50 ratio for its in-house and third-party mining contractors by around 2025. Moreover, we also believe PTBA that could deliver its expected volume growth of 9% FY16-19F CAGR on the back of railway capacity expansion.

Strong momentum for coal prices supports PTBA’s ASP. We believe PTBA will continue to post strong y-o-y earnings growth momentum (as seen in 3Q17) on sustained coal sales volume growth and higher ASP. Resilient coal pricing will continue to buoy the coal ASP for both its domestic and export markets. Valuation:

We maintain our target price of Rp16,900. Our DCF-based target price (WACC: 11.6%, LT growth: 0%) implies 10.9x FY18F PE. Maintain BUY rating. Key Risks to Our View:

Operational execution risk. If PTBA fails to maintain its low cash cost trend, such as failing to clinch a favourable mining contracting rate from third-party contractors, its earnings could miss our expectations.

At A Glance Issued Capital (m shrs) 2,304 Mkt. Cap (Rpbn/US$m) 27,189 / 2,006 Major Shareholders (%) Republic of Indonesia (%) 65

Free Float (%) 35 3m Avg. Daily Val (US$m) 3.9 ICB Industry : Basic Materials / Mining



Tambang Batubara Bukit Asam Version 7 | Bloomberg: PTBA IJ | Reuters: PTBA.JK Refer to important disclosures at the end of this report

Page 26

Company Guide

Tambang Batubara Bukit Asam


Critical Factors

NPAT growth will turn positive on better ASP outlook. PTBA’s earnings will grow at a CAGR of 54% over FY16-FY18, on the back of higher coal ASP in both the domestic and export markets. PTBA will maintain its strict efficiency policies and production volume expansion of 12% y-o-y in FY17 and FY18. A higher ASP will allow PTBA to normalise its profitability in FY17 after hitting an all-time low in FY16. Better coal prices for the export market, in line with better outlook for benchmark prices. PTBA’s blended ASP will rise to Rp762k per ton in FY17 on higher benchmark prices. Amid the better outlook for benchmark prices, PTBA’s export prices can outpace domestic prices, which tend to be fixed in the prior year. Production CAGR of 12% over FY16-18F on railway capacity expansion. We assume that PTBA’s coal production and sales volume will grow by 12% CAGR (FY16-18F) to 24.8m tons in FY18 on railway capacity expansion. Our projected production and sales volume is lower than management’s guidance, as our assumption for railway capacity expansion is less bullish, at an 11% CAGR (FY16-18F) to 30m tons. PTBA’s sales volume growth is backed by long-term committed volumes of 574m tons with major buyers, mainly PLN (45% of long-term sales). Stable cash cost outlook given PTBA’s strict cost control and large operational scale. PTBA’s total cash cost (including royalty fees) is estimated to decrease 8% y-o-y, thanks to lower mining contracting fees and other stable operating cash cost, given that the strip ratio will remain stable at 4.5x.

Sales Volume-mn tons

Avg selling price(Ro000/ton)

Cash cost/ton (Rp000/ton)

Capex (Rpbn)

Railway capacity (mn ton)


Page 27

Company Guide


Appendix 1: A look at Company's listed history – what drives its share price? PTBA’s share price vs. operating margin performance Remarks

PTBA’s share price downtrend has been tracking its profitability and earnings because of falling coal prices (due to prolonged oversupply over the last five years). Despite the profitability improvement since 2016, its share price performance still lags behind that of its peers and the JCI (see next chart).

*share price in US dollar currency PTBA’s share price performance vs. JCI since January 2009

Remarks

The chart here shows

that the market has not

really priced in the

recovery in coal prices, as

the share price has been

underperforming relative

to the JCI since January

2009. PTBA’s share price

tends to outperform

when coal prices are

bullish, as seen in 1Q09-

1Q12).

PTBA’s share price performance vs. coal price trend since January 2009

Remarks Share price Coal price

Source: Bloomberg Finance L.P., Company, DBSVI

Historically, PTBA’s share

price has tracked the

Newcastle coal price

benchmark and we

believe the trend will

persist, given that coal

price is a significant

driver of PTBA’s share

price performance.

Beyond PTBA’s earnings

recovery, a steady coal

price outlook in 2H17 on

seasonal winter restocking

will support PTBA’s share

price in 2H17.

0

10

20

30

40

50

60

0

1

1

2

2

3

3

Jan‐09

Jul‐09

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Jan‐14

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Jul‐15

Jan‐16

Jul‐16

Jan‐17

PX_LAST OPER_MARGIN

‐

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan‐09

Jul‐09

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Jul‐11

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Jul‐12

Jan‐13

Jul‐13

Jan‐14

Jul‐14

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Jul‐15

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Jul‐16

Jan‐17

PTBA JCI

0.0

0.2

0.4

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1.0

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4.0


PTBA Coal price

Share price downtrend on profitability contraction era due to bearish coal price cycle Sustaining strong

profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16

PTBA underperformed the index during the prolonged coal price downtrend since 2012. The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist

Page 28

Company Guide


Balance Sheet:

Low gearing balance sheet. PTBA has low gearing on the back of the low capex spending in the future. This will give it financial flexibility such as the ability to accelerate power plant projects or pay special dividends if and when coal prices are low. Most of PTBA’s additional loans are allocated to its subsidiaries such as for the equipment and fleet expansion of its mining contracting subsidiary. Share Price Drivers:

Shares move in tandem with coal prices. PTBA's share price is correlated with its profitability outlook, which is determined by two critical factors – coal ASP and its cash cost outlook. A period of higher coal prices is usually followed by higher share prices for coal miners, on the back of better earnings growth and an improved profitability outlook. Key Risks:

Slower-than-expected production expansion. Slower-than- expected railway capacity expansion can lead to disappointing production and sales volume. PTBA relies a lot on the execution and scale of PT KAI’s plan to expand railway capacity. Slower expansion will translate into lower sales volume and revenue growth trend vs. our forecast. Higher-than-expected cash cost. PTBA’s margin will face contraction if it fails to maintain its low cash cost trend, such as failing to renegotiate favourable railway transportation and mining contracting fees with third-party mining contractors, or if PTBA’s new equipment fleet fails to achieve meaningful operating efficiencies. A higher-than-expected cash cost means that PTBA’s margin and earnings growth could be lower than our forecast. Company Background

PTBA is one of Indonesia's largest coal miners, with 1.99bn tons of coal reserves. Its main coal-mining concession is located in Tanjung Enim, South Sumatra. It is a state-owned company, with the government as its major shareholder.


ROE (%)

Forward PE Band (x)

PB Band (x)


Page 29

Company Guide


Key Assumptions

FY Dec 2015A 2016A 2017F 2018F 2019F Sales Volume-mn tons 19.3 19.8 22.2 24.8 25.6 Avg selling 769 707 761 767 767 Cash cost/ton (Rp000/ton) 632 607 510 525 525 Capex (Rpbn) 1,742 931 1,484 1,120 941 Railway capacity (mn ton) 22.0 24.0 27.0 30.0 22.7

Income Statement (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 13,734 14,059 16,875 18,742 20,451 Cost of Goods Sold (9,594) (9,657) (11,377) (12,701) (13,270) Gross Profit 4,140 4,402 5,498 6,041 7,181 Other Opng (Exp)/Inc (1,725) (1,871) (1,519) (1,687) (1,841) Operating Profit 2,414 2,531 3,980 4,354 5,341 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 134 150 169 188 205 Net Interest (Exp)/Inc 116 52.9 166 250 365 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,664 2,734 4,315 4,791 5,910 Tax (627) (709) (1,079) (1,198) (1,477) Minority Interest (1.2) (18.2) (1.5) (1.6) (1.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 2,036 2,006 3,235 3,592 4,430 Net Profit before Except. 2,036 2,006 3,235 3,592 4,430 EBITDA 2,699 2,948 4,298 4,694 5,720 Growth Revenue Gth (%) 5.0 2.4 20.0 11.1 9.1 EBITDA Gth (%) 4.4 9.2 45.8 9.2 21.9 Opg Profit Gth (%) 4.5 4.8 57.2 9.4 22.7 Net Profit Gth (Pre-ex) (%) 1.0 (1.5) 61.2 11.0 23.3 Margins & Ratio Gross Margins (%) 30.1 31.3 32.6 32.2 35.1 Opg Profit Margin (%) 17.6 18.0 23.6 23.2 26.1 Net Profit Margin (%) 14.8 14.3 19.2 19.2 21.7 ROAE (%) 23.0 20.5 28.6 27.2 28.8 ROA (%) 12.8 11.3 16.2 15.9 17.5 ROCE (%) 15.6 14.4 19.5 18.3 19.5 Div Payout Ratio (%) 45.0 41.5 45.0 45.0 45.0 Net Interest Cover (x) NM NM NM NM NM


Page 30

Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 3,283 4,017 4,547 4,420 4,255 Cost of Goods Sold (2,488) (2,061) (2,855) (2,767) (2,553) Gross Profit 795 1,956 1,692 1,653 1,702 Other Oper. (Exp)/Inc (145) (203) (257) (260) (289) Operating Profit 417 1,197 1,223 1,255 1,229 Net Interest (Exp)/Inc (33.5) (36.7) (56.1) (53.3) (31.5) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 452 1,289 1,218 1,256 1,252 Tax (111) (283) (335) (393) (334) Minority Interest (0.8) (14.7) (13.0) (9.8) (15.8) Net Profit 340 991 871 853 902 Net profit bef Except. 340 991 871 853 902 EBITDA 0.0 0.0 0.0 0.0 0.0 Growth Revenue Gth (%) 2.2 22.3 13.2 (2.8) (3.7) EBITDA Gth (%) nm nm nm nm nm Opg Profit Gth (%) (8.7) 187.1 2.2 2.6 (2.0) Net Profit Gth (Pre-ex) (%) (10.3) 191.6 (12.2) (2.0) 5.7 Margins Gross Margins (%) 24.2 48.7 37.2 37.4 40.0 Opg Profit Margins (%) 12.7 29.8 26.9 28.4 28.9 Net Profit Margins (%) 10.4 24.7 19.2 19.3 21.2

Balance Sheet (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 5,579 6,088 6,097 6,085 6,146 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 3,717 4,139 5,189 6,066 6,670 Cash & ST Invts 3,115 3,675 5,551 6,940 8,855 Inventory 1,233 1,102 1,298 1,449 1,514 Debtors 1,596 2,285 1,857 2,063 2,251 Other Current Assets 1,654 1,288 1,288 1,288 1,288 Total Assets 16,894 18,577 21,280 23,890 26,724 ST Debt 0.0 490 0.0 0.0 0.0 Creditor 1,146 539 685 765 799 Other Current Liab 3,777 4,013 4,013 4,013 4,013 LT Debt 623 2,141 3,409 3,964 4,326 Other LT Liabilities 2,061 841 841 841 841 Shareholder’s Equity 9,175 10,421 12,200 14,176 16,613 Minority Interests 113 131 131 131 131 Total Cap. & Liab. 16,894 18,577 21,280 23,890 26,724 Non-Cash Wkg. Capital (440) 122 (255) 21.5 240 Net Cash/(Debt) 2,492 1,044 2,141 2,976 4,528 Debtors Turn (avg days) 40.3 50.4 44.8 38.2 38.5 Creditors Turn (avg days) 32.7 32.8 19.9 21.1 21.8 Inventory Turn (avg days) 43.8 45.4 39.0 40.0 41.3 Asset Turnover (x) 0.9 0.8 0.8 0.8 0.8 Current Ratio (x) 1.5 1.7 2.1 2.5 2.9 Quick Ratio (x) 1.0 1.2 1.6 1.9 2.3 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 279.5 29.5 9.6 8.3 9.8 Z-Score (X) 4.4 4.2 4.3 4.2 4.3


Page 31

Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 2,664 2,734 4,315 4,791 5,910 Dep. & Amort. 150 267 318 340 362 Tax Paid (627) (709) (1,079) (1,198) (1,477) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 245 (1,165) 378 (277) (219) Other Operating CF 285 336 105 (85.9) (88.5) Net Operating CF 2,717 1,462 4,037 3,571 4,487 Capital Exp.(net) (1,742) (776) (328) (328) (423) Other Invts.(net) (134) (155) (1,156) (792) (518) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 90.0 (1,147) 0.0 0.0 0.0 Net Investing CF (1,786) (2,078) (1,484) (1,120) (941) Div Paid (1,050) (832) (1,456) (1,616) (1,994) Chg in Gross Debt (806) 2,008 779 555 362 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 0.0 0.0 0.0 0.0 0.0 Net Financing CF (1,855) 1,175 (677) (1,062) (1,631) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (924) 559 1,876 1,389 1,914 Opg CFPS (Rp) 1,073 1,140 1,588 1,670 2,042 Free CFPS (Rp) 423 298 1,610 1,408 1,764



Source: DBSVI


Industry Focus

Thermal coal sector

Page 32

DBSVI recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 15 Nov 2017 15:11:34 (WIB) Dissemination Date: 15 Nov 2017 15:56:03 (WIB)

Sources for all charts and tables are DBSVI unless otherwise specified.

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Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

Industry Focus

Thermal coal sector

Page 33

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Industry Focus

Thermal coal sector

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Industry Focus

Thermal coal sector

Page 35

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Industry Focus

Thermal coal sector

Page 36

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Documents

Coal sector 15-Nov-2017 concessions will remain the key coal supply bottleneck in Indonesia. Existing well-established coal miners are still aiming for flattish to single-digit indicative