indy 2 BUY … 021210
We re-initiating coverage on INDY with a BUY rating and Dec-11 TP of IDR 4,300/share, implying 11.7% upside potential. INDY is an integrated Indonesian energy company concentrating in its three business pillars of energy resources, energy services, and energy infrastructure. Its earning profile is robust with an estimated 15% CAGR FY10F-FY12F. We also expect ROE to rise from 14% in FY09 to an average 27% in FY10-FY12F.
Total contract value of USD$ 2.14 bn acquired recently should underscore visibility into normalized fundamentals. Total value of Tripatra’s contract is roughly USD$ 1.32 bn and the newly acquired Petrosea has secured backlog order worth USD$ 1.62 bn. We expect FY11F top-line revenue to almost double to IDR 4.6 trillion.
The changes schemes. INDY plans to use Petrosea to be a mining contractor for overburden and coal extraction for Kideco as the third largest coal producer in Indonesia by 2011F. We expect a successful change in the mining schemes to result in the lower cash costs, and therefore, material improvement in the group’s profitability (of course, assuming the coal prices remain elevated).
Another catalyst drivers. Energy resources business line has expansion plans in place, intending to grow production by acquiring West Kalimantan Project that expected to start contributing to operation by 4Q14 and Santan Batubara with expected annual production 2.5MT pa. The construction progress of Energy infrastructure, CEP, also is on track and is expected to be accomplished by end-2010. These catalyst should drive the share price.
Valuation, TP, and risk. Our Dec-11 TP of IDR 4,300/share is derived from the sum-of-the-parts (SOTP) of INDY’s individual subsidiary (based mostly on DCF and WACC of 10.7%), with the remaining business valued using carrying value of investment. At our TP of IDR 4,300, we value INDY at FY11F P/E of 7x and 22x EV/EBITDA. Key risk to our TP: (a) a delay in the gestation of the project works; (b) intense competition in engineering and construction industry; (c) volatility in international coal price; (d) IDR appreciation is a risk to earnings given Kideco’s export oriented nature.