Bareksa.com - We downgrade PTBA to Sell with TP Rp8,500 (-23% lower), based on 10.0x FY14F P/E. Our cautious stance due to: 1) Higher operational risk due to reliance on PT KAI for the railway capacity expansion, hence impeding growth. 2) Weakness in coal price (from ~US$85/t to US$81/t) continue diminishes its advantage as low-cost miner. 3) Compared to peers, PTBA would benefit less from IDR depreciation as its domestic/exports sales ratio is the highest, primarily to PLN with annual fixed pricing in IDR. PTBA is currently trading at 10.9x FY14F P/E.

Missed FY13 target, railway underperformance

PTBA missed its 2013 target with coal production/sales of 15.1mt/17.8mt, or formed 83%/ 86% of the guidance. The production and sales volume were also below our expectation, only formed 94% of our FY13 forecast. The railway capacity reached 12.8mt, or only formed 82% of the guidance and our forecast.

Challenging target in 2014

PTBA is guiding for +32% YoY production growth and +40% YoY growth of sales & railway capacity. Given the railway underperformance, we believe the guidance will be very challenging to meet. The company, however, is optimistic due to: 1) Attempt to reduce the track overcrowding; 2) Additional 340 new wagon and 44 locos are fully in operation. PT KAI plans to add 600 new wagons & 6 locomotive units; 3) PTBA starts “Take or Pay” tariff with PT KAI in 2014; 4) The unloading facilities at Tarahan Port has an increased capacity of 25mt p.a.

Cutting 2013/14F earnings by 12%/3%

We incorporated FY13 operational results and lowered our production and sales assumption by –6%. We cut 2013F earnings by 12% and trimmed 2014/15F earnings by -3%/-0.5%. In our previous note, we warned about possible consensus downgrade and near term downside risk to the stock. The stock has declined by ~26% since then. Most of PTBA earnings downgrade appear to have occurred between Dec 2013 to Jan 2014. The consensus earnings for 2014/15F are now in line with ours.

FY13 Operational Results - Missed the target, railway underperformance

PTBA missed its 2013 target with coal production and sales volume reached 15.1mt and 17.8mt respectively. These formed only 83% and 86% of the company guidance. In 2013, the company booked 9% YoY production growth and 16% YoY sales volume growth. Despite the volume growth, FY13 production and sales results were below our expectation as these formed only 94% of our forecasts. At the same time, the company also missed the railway capacity target for FY13 which formed only 82% of our forecast.

Back in October 2013, we emphasized our main concern about the railway underperformance in 3Q13 as key operational risk for PTBA to meet 2013 target. The railway underperformance for FY13 has caused PTBA to miss both production and sales target. PTBA appears to make up the shortage in production volume partially through coal purchase that grew significantly by 69% YoY and formed 142% of the guidance.

2014 Guidance - Challenging growth target in railway capacity and sales volume

As for 2014, PTBA is guiding for the coal production of 20mt (+32% YoY growth) and coal sales of 25mt (+40% YoY growth). In line with the sales target growth, the company plans to increase the railway capacity to 18mt (+40% YoY growth). Given the historical railway performance, we believe the guidance is over-stretched and will be very challenging to meet. The management, however, is optimistic to achieve 2014 target due to:

1) Attempt to reduce the track overcrowding: the double track project from Prabumulih to Niru has reached 70% from completion. By 1H14, the company is targeting to complete double track from Niru to Tanjung Enim.

2) The additional 340 new wagon and 44 locomotive units in 2013 are fully in operation. PT KAI plans to add 600 new wagons and 6 locomotive units.

3) PTBA starts “Take or Pay” tariff with PT KAI in 2014, as a form of commitment from both parties to increase the railway capacity.
4) The unloading facilities at Tarahan Port has an increased capacity of 25mt p.a in 2014. Around June 2014, the new Jetty with Cape size vessels (150.000— 200.000 DWT) will be in operation.

Forecast changes— cutting 2013/14F earnings by 12%/3%

We have incorporated the FY13 operational results and lowered our production and sales volume assumptions by –6%. We cut our 2013F earnings by 12%, while our 2013F revenue decreased by 8% due to lower ASP (-1%). We also increased the USD-IDR exchange rate assumptions for 2013/14/15F by 5%/8%/10%. However, that does not affect weighted ASP significantly as we also lower the export ASP by 7% at the same time.

Using the 2014 company guidance as reference, we keep our key assumption largely unchanged for 2014/15F, with only a small increase (+2%) in the sales volume. To better reflect the historical performance vs. the company guidance, we have applied 15% discount on the target volumes to arrive at our overall volume assumptions. Our 2014/15F revenues remain largely unchanged as lower ASP assumptions offset the increase in sales volume. We also trimmed our 2014/15F earnings by -3%/-0.5%.

In our 31 October 2013 results note, we already warned about possible consensus earnings downgrade in the near future and near term downside risk to the stock. The stock has declined by ~26% since then. In fact, most of earnings downgrade appear to have occurred between December 2013 and January 2014. The consensus earnings for 2014/15F are now in line with ours.

Valuation and Recommendation - downgrade to Sell

In previous reports, we already identified that one of the key risk to our valuation and recommendation on PTBA is related to the railway capacity and port expan-sion. Given its FY13 underperformance, the railway capacity remains as key risk in the near and medium term, impeding PTBA to achieve its growth potential. We downgrade our rating to Sell (from Hold) and lower our target price to Rp8,500 (-23% lower), which is now based on 10.0x FY14F P/E (vs. previously 12.5x). PTBA is currently trading at 10.9x FY14F P/E.

Despite a number of positive sentiment in the sector in late 4Q13 (largely driven by IDR depreciation that benefits the USD earners), we now have more cautious stance on PTBA due to mixed bags of global and company-specific risks:

- High operational risk due to reliance on PT KAI for achieving the railway capacity expansion. This would continue to impede PTBA growth. Despite all mitigation measure such as Take or Pay tariff, we are yet convinced until we see some strong evidence that PT KAI delivers their commitment.
- Weakness in coal price that fell from ~US$85/t to US$81-82/t. This would continue diminishing PTBA competitive advantage as a low cost coal-miner.
- Compared to its peers (ADRO, ITMG), PTBA would benefit less from IDR depreciation as its domestic/exports sales ratio is the highest (47%). Domestic sales are primarily to PLN with annual fixed pricing in IDR.

Over the long-term, PTBA has a defensive nature due to its long-term domestic coal sales contract with PLN and internal coal sales for its future mine-mouth power plants. In addition, PTBA has a strong balance sheet with net cash position (no debt) to weather commodity down-cycle. However, we need to see some evidence on improving railway performance, which means less operational risk for PTBA, before we turn positive on PTBA.

Key (Upside) Risks

- Better than expected global coal price/index (benchmark Newcastle coal price above US$90/t);
- Able to negotiate better pricing for new PLN contracts in 2014;
- Improved railway performance by PT KAI that delivers or exceeds 2014 com-pany guidance (18mt per annum or more).

*Franky Kumendong is PT Buana Capital's market analyst. This article is part of the Equity Research of PT Buana Capital