indonesia mining contracting sector

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27 September 2012

Asia Pacific/Indonesia

Equity Research

Industrial Machinery (Metals & Mining/Industrial Machinery) / OVERWEIGHT

Indonesia Mining Contracting Sector

INITIATION

Time to re-visit

Figure 1: Indonesia coal production: low cost and still growing

500

1,500

2,500

3,500

4,500

50

150

250

350

450

550

2009 2010 2011 2012E 2013E 2014E

Production volume (mn tonnes)

Estimated overburden (mn bcm) - RHS

6550

85

7 32

33

0

20

40

60

80

100

120

Indonesia Columbia US (CAPP/NAPP)

FOB Cost Freight

Newcastle coal price ($90/t)

Source: Company data, MEMR, Bloomberg, Credit Suisse estimates

■ Back to fundamentals: The price performance of the Indonesian mining

contracting stocks in the past five months reflects the market view that the

mining contracting performance has a strong correlation with coal price

movement and has priced in the downside risks. However, our analysis shows

that the long-term correlation is very low (0.1). We believe that the mining

contracting business benefits from Indonesia’s growing coal mining activities,

underlining its status as a major seaborne coal supplier with the Indonesian

coal companies being among the lowest-cost producers in the region.

■ Still growing: With thermal coal demand rising and being among the

lowest-cost producers in the region, we expect Indonesia’s coal output to

continue rising. Hence, we anticipate the overburden removal to grow with

higher coal output and strip ratio as miners move to more difficult areas to

mine coal. This provides long-term growth opportunity for the mining

contracting companies.

■ Stock calls: Our prefered stock is United Tractors as we believe the current

share price has reflected the downside risks in the heavy equipment sector

and weak mining contracting revenues. The second choice is Indika Energy,

which we initiate with an OUTPERFORM rating, as its share price has fallen

sharply and that its main earnings contribution is from the coal mining. We

initiate ABM Investama and Delta Dunia with NEUTRAL ratings.

Research Analysts

Ami Tantri

62 21 2553 7976

[email protected]

Dian Haryokusumo

62 21 255 37974

[email protected]

27 September 2012

Indonesia Mining Contracting Sector 2

Focus charts and table Figure 2: To benefit from growing Indonesia coal

production and overburden volume

Figure 3: Low correlation with coal price

500

1,500

2,500

3,500

4,500

50

150

250

350

450

550

2009 2010 2011 2012E 2013E 2014E

Production volume (mn tonnes)

Estimated overburden (mn bcm) - RHS

60

80

100

120

140

160

180

200

0%

50%

100%

150%

200%

250%

300%

350%

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Indo Mining Contracting perf rel to JCI

Coal Price (RHS)

$/ton

R = 0.39

R= - 0.54R= - 0.24

Long Term R = 0.1

R= 0.92

Source: Company data, MEMR, Credit Suisse estimates Source: Bloomberg

Figure 4: Indonesia—the lowest cost producer for China

market US$/tonne

Figure 5: Indonesia contributes 40% to total seaborne

market Mn tonnes

65

50

85

7 32

33

0

20

40

60

80

100

120


FOB Cost Freight

Newcastle coal price ($90/t)

-

100

200

300

400

500

600

700

800

900

1,000

2009 2010 2011 2012E 2013E 2014E

Export volume Production volume Global seaborn coal exports

Source: Credit Suisse estimates, calorific value adjusted Source: MEMR, Credit Suisse estimates

Figure 6: Indonesia mining contracting valuation table

Price TP Upside M Cap P/E (x) P/B (x) EV/EBITDA (x) Div Yield (%)

Company Ticker Rtg (local) (local) % ($ mn) 12E 13E 12E 13E 12E 13E 12E 13E

United Tractors UNTR.JK O 21,350 28,000 31% 8,322 14.7 11.5 2.7 2.4 6.5 5.0 3% 3%

ABM Investama ABMM.JK N 3,550 3,800 7% 1,021 8.9 7.5 2.3 1.8 5.1 4.1 0% 0%

PT Indika Energy Tbk INDY.JK O 1,620 2,700 67% 882 4.2 5.7 1.0 0.9 11.9 8.1 7% 9%

Delta Dunia Makmur DOID.JK N 250 315 26% 213 (3.7) 39.5 5.2 4.6 3.9 3.3 0% 0%

Indonesia mining

contracting

12.9 11.2 2.6 2.2 6.8 5.1 3% 3%

Source: Company data, Credit Suisse estimates

27 September 2012


Time to re-visit Back to fundamentals

On the contrary to the market belief that the share price performance of mining contracting

companies correlate to commodity prices, primarily to the coal price in Indonesia, our

analysis shows that the long-term correlation is only 0.1. Only recently (over the past five

months), they seem to have a strong correlation as both have fallen for different reasons.

Coal price fell because of an oversupply situation, not so much on demand, as demand for

thermal coal remains strong. However, the share price performance of the mining

contracting companies was more affected by the economic slowdown. As Indonesia’s coal

mining companies are among the lowest-cost producers and Indonesia is the largest

seaborne coal supplier, we still expect growth in output, which would be beneficial to the

mining contracting companies.

Long-term growth opportunity

We expect to see medium- to long-term growth in Indonesia’s coal production considering

that demand for coal remains strong, Indonesian mining companies in general are among

the lowest-cost produders, and the importance of Indonesia in the seaborne coal market.

Consequently, the growth in mining activities is beneficial for the mining contracting

companies. Despite the decline in commodity prices (primarily coal), we have not seen

any indication in the decline in mining activites judging from the overburden removal. We

expect Indonesia’s coal production to witness a 7% CAGR over the next three years.

Consequently, we are confident with the medium to long-term growth of mining contracting

activities in the country.

Regulations favour local companies

The government of Indonesia is inclined to support local business and new regulations

have come out in favour of them. Under the mining law issued in 2009, mining companies

have to use local mining contracting companies for their work, unless certain skills or

capacity are unavailable in the local market. This has widened the door for growth for the

local mining contracting companies. The mining law also requires mining companies not to

rely on the mining contracting companies for its mining activities. That is, the mining

companies have to take charge of their mining operations. Therefore, there will be

changes in the mining contracts, which reflect more like heavy equipment rental, but it

would not materially affect the revenue of the mining contracting companies.

We prefer United Tractors

Our preferred stocks in the sector are United Tractors (UNTR.JK) with an OUTPERFORM

rating and a target price of Rp28,000. The share price reflects the downside risk on the

heavy equipment sales, and we believe that the mining contracting business, the second-

largest revenue contributor, will remain strong. Our second choice is Indika Energy

(INDY.JK) being initiated with an OUTPERFORM rating and a target price of Rp2,700.

Indika’s mining contracting is undertaken by Petrosea (PTRO.JK), its subsidiary, the sixth-

largest, and the company owns a 46% stake in Kideco, the fourth-largest coal mining

company. We initiate ABM Investama (ABMM.JK) with a NEUTRAL rating and target price

of Rp3,800. It is an integrated mining company, involved in activities ranging from mining

contracting, barging, power supply, and coal mining, and has potential for strong growth.

The company belongs to the group which is the sole distributor of Catepillar in Indonesia

(not listed). We initiate Delta Dunia with a NEUTRAL rating and a target price of Rp315.

Despite the company’s strong operating cash flow, we are concerned with its balance

sheet with 8x net debt to equity.

Low long-term correlation

between mining contracting

performance and coal price

Indonesia mining companies

are among the lowest-cost

producers, therefore we still

expect to see growth in the

mining contracting activities

The government favours

local companies

Our top pick is United

Tractors

27 S

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Min

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ctin

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Figure 7: Regional valuation comparison

Price TP Upside Mkt cap P/E (x) P/B (x) EV/EBITDA (x) EPS growth (%) Div Yield (%) ROE (%)

Company Ticker Rtg (local) (local) % ($ mn) 12E 13E 12E 13E 12E 13E 12E 13E 12E 13E 12E 13E

Indonesia mining contracting

12.9 11.2 2.6 2.2 6.8 5.1 24% 32% 3% 3% 19% 22%

ABM Investama ABMM.JK N 3,550 3,800 7% 1,021 8.9 7.5 2.3 1.8 5.1 4.1 237% 148% 0% 0% 30% 26%

Delta Dunia Makmur DOID.JK N 250 315 26% 213 (3.7) 39.5 5.2 4.6 3.9 3.3 255% -109% 0% 0% -82% 12%

PT Indika Energy Tbk INDY.JK O 1,620 2,700 67% 882 4.2 5.7 1.0 0.9 11.9 8.1 71% -27% 7% 9% 27% 17%

United Tractors UNTR.JK O 21,350 28,000 31% 8,322 14.7 11.5 2.7 2.4 6.5 5.0 -13% 28% 3% 3% 19% 22% Regional construction & engineering

12.1 9.2 1.6 1.5 4.6 4.1 95% 32% 5% 6% 14% 17%

Downer EDI DOW.AX O 3.66 4.10 12% 1,637 8.0 7.5 1.1 1.0 3.2 3.1 0% 8% 0% 0% 14% 13%

UGL Limited UGL.AX O 10.6 13.00 23% 1,837 11.0 10.8 1.5 1.5 7.5 7.3 1% 1% 7% 7% 14% 13%

Leighton Holdings LEI.AX N 16.53 17.60 6% 5,807 13.6 9.3 2.0 1.8 3.2 2.8 183% 46% 5% 6% 15% 20%

Transfield Services Ltd TSE.AX N 1.78 2.05 15% 961 12.5 8.7 0.9 0.9 8.6 6.6 -30% 44% 8% 8% 7% 10%

Clough CLO.AX O 0.72 0.97 35% 581 11.6 8.3 1.6 1.5 6.4 5.2 -5% 40% 4% 7% 14% 18%

Indonesia coal 10.6 10.8 3.4 3.2 6.3 6.5 -5% -1% 5% 5% 32% 28%

PT Adaro Energy Tbk ADRO.JK N 1,500 1,600 7% 5,013 9.2 8.8 1.8 1.6 4.9 4.8 -1% 5% 4% 5% 20% 18% PT Tambang Batubara Bukit Asam Tbk PTBA.JK O

16,250 19,000 17% 3,912 11.1 10.6 3.9 3.3 7.2 6.7 9% 5% 5% 5% 35% 31%

PT Indo Tambangraya Megah ITMG.JK N

42,050 38,000 -10% 4,965 11.5 13.1 4.7 4.7 6.9 7.9 -21% -12% 7% 7% 41% 36%

Regional coal 9.1 10.9 1.3 1.2 4.8 4.8 -12% -14% 3% 3% 14% 11%

China Shenhua 1088.HK O 29.85 38.00 27% 76,582 10.3 10.5 1.9 1.7 5.6 5.3 3% -2% 3% 3% 18% 16%

Yanzhou Coal Mining Co. 1171.HK U 11.54 7.10 -38% 7,321 6.9 13.4 1.0 1.0 5.3 6.4 -25% -49% 4% 2% 14% 7%

China Coal Energy Co. 1898.HK O 7.11 8.50 20% 12,160 9.6 9.3 0.9 0.8 3.5 3.0 -19% 3% 3% 3% 9% 9%

BHP Billiton BHP.AX N 33.25 35.00 5% 178,071 9.8 11.9 2.8 2.5 6.0 6.1 -18% -17% 3% 3% 29% 21%

Rio Tinto RIO.AX O 53.97 70.00 30% 92,740 10.4 8.3 1.8 1.5 5.0 4.2 -31% 26% 3% 3% 17% 18%

Whitehaven Coal WHC.AX O 2.91 4.40 51% 3,073 28.9 31.8 0.4 0.9 19.6 14.2 -31% -9% 18% 2% 2% 2%

Anglo American Plc AAL.L N 1887.5 2,200 17% 42,589 13.2 10.4 1.1 1.1 5.0 4.1 -52% 26% 3% 3% 8% 10%

Peabody Energy Corp BTU O 22.94 29.00 26% 6,156 10.9 9.8 1.0 0.9 6.6 5.8 -53% 11% 1% 1% 9% 10%


27 September 2012


Back to fundamentals The decline in coal price has raised concerns on the mining contracting companies

regarding the possibility of mining companies cutting down production and re-negotiating

contracts. The market believes that the mining contracting stocks correlate strongly with

commodity prices, and particularly with coal price in Indonesia. Some of the major coal

mining companies have cut down production and cut capex. However, none of them has

reduced the overburden removal activities nor re-negotiated contracts with mining

contractors.

Only in the past five months have we seen the share performance of mining contracting

companies to having strong correlation with the coal price movement. They came off at the

same time for different reasons. Coal price fell because of an oversupply situation

primarily from the US, despite demand remaining strong. Meanwhile, the mining

contracting share prices fell more due to the economic slow down and oversupply of heavy

equipment in China, in our view.

Our analysis shows that the long-term correlation between coal price and the share price

of mining contracting companies is low with a correlation of only 0.1. In a rising coal price

environment, there is positive sentiment to support the share price movement. However, in

a declining coal price environment, the correlation was less than 0.4 or even negative. In

addition, we have not seen any decline in overburden removal and no major coal

companies in Indonesia have re-negotiated with their mining contractors.

Figure 8: Correlation of share price performance and coal price

60

80

100

120

140

160

180

200

0%

50%

100%

150%

200%

250%

300%

350%

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Indo Mining Contracting perf rel to JCI Coal Price (RHS)

$/ton

R = 0.39

R= - 0.54R= - 0.24

Long Term R = 0.1

R= 0.92

Source: Bloomberg

The mining contracts are not related to commodity prices. Moreover, revenue of mining

contracting companies are not directly related to commodity prices. The concern is on the

decline in mining activities. However, considering that Indonesian mining companies are

among the lowest-cost producers, we have also seen growth even in the declining

commodity prices. In the coal sector, during the low coal price environment, we still expect

mining contracting activities to continue their growth as most of the Indonesian coal mining

companies are among the lowest-cost producers and remain profitable at low coal prices.

We still anticipate mining activities to grow, primarily coal production, which provides

opportunity for mining contracting companies to continue their growth. Therefore, we

believe it is time to look at the fundamentals.

The market believes that

mining contracting

performance correlates to

coal price movement

Long-term correlation

between mining contracting

performance and coal price

is 0.1

Time to focus on

fundamentals

27 September 2012


Long-term growth opportunity Indonesia’s coal production has been witnessing a 12% CAGR since 2007. We expect

demand for coal to increase from China and India. Indonesia being the largest seaborne

coal supplier wth a 40% share of total seaborne exports and among the lowest-cost

producers, we expect coal output to continue growing accordingly.

Indonesia’s coal output was 398 mn tonnes in 2011. We expect this to grow to 519 mn

tonnes by 2014, or a 10% CAGR. Domestic consumption is also expected to witness a 5%

CAGR until 2014, and the seaborne coal import a 5% CAGR during the same period.

Figure 9: Seaborne coal exports In million tonnes

Figure 10: Seaborne coal imports In million tones

0

5

10

15

20

25

30

35

2011 2012 2013 2014 2015

Australia RoW Indonesia

0

5

10

15

20

25

30

35

2011 2012 2013 2014 2015

India RoW China

Source: MEMR, Credit Suisse estimates Source: MEMR, Credit Suisse estimates

Coal demand is expected to grow more from China and India. Currently, their imports

account for 18% and 12% of total seaborne coal imports, respectively. This is expected to

grow to 23% and 17%, respectively in 2015, totalling 40% of total seaborne coal imports.

We expect seaborne imports to witness a 5% p.a. CAGR during the period.

With a total output of 491 mn tonnes expected in 2014, assuming an average strip ratio of

8x, this translates to total overburden of 3.9 bn bcm. Pama Persada, the subsidiary of

United Tractors (UNTR), is the largest national mining contractor, has the capability for

overburden of around 800 mn bcm per annum. Therefore, to be able to move 3.9 bn bcm

of overburden, it requires 5x of Pama’s size. Consequently, the opportunity to grow in the

mining contracting remains high.

Figure 11: Coal and overburden

2009 2010 2011 2012E 2013E 2014E

Production volume (mn tonnes) 290 354 398 429 460 491

Estimated total overburden (mn bcm) 2,316 2,832 3,183 3,429 3,683 3,928

Estimated no of fleets 421 515 579 623 670 714

Estimated additional no of fleets 94 64 45 46 45

Estimated investment requirement (US$mn) 1,032 702 492 509 490

Source: MEMR, Company data, Credit Suisse estimates.

One fleet consists of one excavator, five dump trucks and 0.5 bulldozer, capable of moving

5-6 mn bcm per year. To move 3.9 bn bcm of earth, it requires 714 fleets. With additional 1

bn bcm of earth to be moved, the sector needs additional 130 fleets (845 units of heavy

equipment). If one fleet needs an investment of around US$10-12 mn, the investment to

add heavy equipment would be around US$2 bn in four years, or around US$550 mn

investment per year.

In the past, the mining contracting activities were dominated by foreign mining contracting

companies, such as Thiess. As the government requires the use of local or national mining

Demand for mining

contracting continues to

growth

27 September 2012


contracting companies, we see more local names in the sector. Pama is the largest national

mining contracting company. Buma, under Delta Dunia (DOID) is the second largest.

Figure 12: UNTR is the largest mining contracting

company

Figure 13: UNTR—much larger than the next competitor Million bcm

42%

16%

9%

6% 5% 4% 3%

15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

UNTR DOID Thiess Leighton SIS INDY DharmaHenwa

Others

118

334

116

792

0

100

200

300

400

500

600

700

800

900

ABMM DOID INDY UNTR

Source: United Tractors Source: Company data

Although coal demand in general remains in line with expectation, we are concerned with

the high level of inventory at power plants in major coal importing countries and the use of

hydropower plants in China and slowdown in the overall economy. We underestimated

oversupply of coal due to the impact of shale gas in the US, which freed up coal from the

US and Colombia, the traditional exporter of coal to the US. With overcapacity of capsize

ships causing a decline in freight rate, it has enabled the US and Colombian coal

producers to ship their coal to Asia. Newcastle coal price fell to the lowest level of US$80/t

level, but it has recovered to US$90/t currently. Our global commodity team is expecting

coal prices to recover in 4Q12 and to go up to US$100/t in 2013. However, considering the

size of oversupply in the US and Colombia, and the high inventory level in China, we

expect coal prices to stay at the current level for a while, until we see a significant cut in

global coal production by high-cost producers.

In a lower coal price environment, mining companies will start moving operations to areas

with a lower strip ratio to reduce cost per tonne. If coal price continues to remain low for

longer-than-expected periods, these companies will start cutting down production. In the

case of a stand-by condition, mining contracting companies will receive compensation as

normally stated in the contract. Although moving to a lower strip ratio area also means

lower overburden removal.

Mining costs have increased over time primarily due to longer hauling distances, an

increasing strip ratio, and also increasing oil price. The increase in oil price is passed

through to the mining companies. Increasing hauling distance is normally reflected in the

contract, but for some contracts it could be beneficial for mining companies. The

inefficiency in equipment use could become the burden of mining contracting companies.

However, up to this moment, we have not heard any major coal mining companes

announcing re-negotiation of contracts with mining contracting companies although some

of them have cut production and delayed expansion projects. We consider that the risk of

this to happen is with low-grade coal producers and small coal miners, rather than the

high-grade producers and large mining companies.

Indonesia’s coal mining companies are among the lowest-cost producers, consequently,

they are likely to remain profitable at the low coal price environment. There could be some

short-term slowdown in terms of their mining activities. However, we still expect mining

activities to grow in the medium to long term.

Coal price may stay low but

mining activities will

continue to grow

Indonesia mining companies

are among the lowest cost

producers

Short-term slow down

during low price

environment

Risks more on low grade

and small coal producers

27 September 2012


Figure 14: Cost of producers for China market US$/tonne

Figure 15: Cost of producers for Europe market US$/tonne

6550

85

7 32

33

0

20

40

60

80

100

120


FOB Cost Freight

80 85

60

109.5

22

0

20

40

60

80

100

120

Russia US (CAPP/NAPP) US Illinois*

FOB cash cost Freight

Source: Credit Suisse estimates; calorific value adjusted Source: Credit Suisse estimate. * Has 3% sulphur, priced at 15% disc

to API

Figure 16: Average selling price vs cash cost US$/tonne

Figure 17: Indonesia coal output Million tonnes

-

20

40

60

80

100

120

ADRO SAKR PTBA HRUM ITMG

Cash cost ex SGA& royalty Royalty

Railway cost SGA

ASP ($/t)

-

100

200

300

400

500

600

700

800

900

1,000

2009 2010 2011 2012E 2013E 2014E

Export volume Production volume Global seaborn coal exports

Source: MEMR, Credit Suisse estimates Source: MEMR, Credit Suisse estimates

In all heavy equipment areas, Komatsu (under United Tractors) has the highest market

share of over 40% with the largest market share in the mining sector of over 50%.

Komatsu also has the largest market share in the agro equipment with over 40% market

share.

Figure 18: Heavy equipment market share in Indonesia

Mining Agro Construction Forestry Total

Komatsu (UNTR) 51% 43% 34% 25% 44%

Caterpillar 22% 15% 21% 5% 19%

Hitachi 12% 33% 25% 44% 21%

Kobelco 5% 9% 20% 26% 10%

Others 10% 0% 0% 0% 6%

Source: Company data, Total market 5,010 equipments

27 September 2012


Figure 19: Heavy equipment market share in 2011 Figure 20: Increasing competition in 6M12

Komatsu (UNTR)

49%

Caterpillar18%

Hitachi (HEXA)15%

Kobelco10%

Others8%

FY2011

Komatsu (UNTR)

44%

Caterpillar19%

Hitachi (HEXA)20%

Kobelco12%

Others5%

6M12

Source: Company data, Total market 17,360 pieces of equipment Source: Company data, Total market 5,010 pieces of equipment

The replacement cycle of mining equipment is normally five years. However, some

companies use equipment for 10 years. Some coal mining companies have cut their capex

programme primarily for the heavy equipment capex. We have seen the decline in heavy

equipment sales. However, judging from the coal output from Indonesia, we still expect

growth in mining contracting work.

The impact of shale gas has freed up coal from the US and also from Colombia, as the US

also imports some coal from Colombia. The oversupply has been enough to disrupt the

Newcastle spot coal price, which fell from the high of US$115/t to US$81/t the lowest.

Demand for coal remains strong, but oversupply has caused coal price to fall to the level

where high cost producers should be out of the market.

We have seen some Indonesian coal companies cutting production targets for this year

and growth as well, considering the current market condition. However, we have not seen

anyone re-negotiating mining contracts, although there is an indication that new contracts

would not be priced higher than the current contracts. The worst case is that mining

contractors would be paid a stand-by fee as the mining companies really cut their

operations significantly.

Some mining companies have cut their capex programmes, and it affects primarily the

heavy equipment considering that they also cut production targets. In addition, some of the

mining companies are also building conveyer belts to reduce costs, hence reducing the

use of trucks. We have seen the decline in heavy equipment sales. The 1H12 heavy

equipment sales from United Tractors (UNTR) were down 2% YoY to 4,333, lower than

market expectation.

The worst case is to get

stand-by fee

Cut capex on heavy

equipment

27 September 2012


Regulation favours local companies Under the mining law issued in 2009 (issued in Jan 2009), mining companies have to use

local or national mining contracting companies, which provide services ranging from

feasibility study, transportation, and mining and processing. Although by hiring a third party

mining contractor, a mining company remains responsible to the overall mining activities.

A mining company is not allowed to use a subsidiary or an affiliated company to conduct

the mining activities, with the exception that they get approval from the Minister of Mining

and Energy. The Minister’s permit can be given under the condition of that no other mining

contracting company has the right capability in the area.

The Minister of Mining and Energy issued a decree 28/2009 regarding the mining

contracting services to follow up the mining law. The decree is for the implementation of

the new law.

The mining company is responsible for the mining activities, which when translated means

taking responsibility for the capital expenditure for providing heavy equipment. This is

currently borne by the mining contracting company. However, mining contracting

companies indicate that there won’t be any changes to the way they work. What might

change is the wording in the contracts - it could be presented as if the mining companies

lease the assets of the mining contracting companies. In addition, the contracts will be

based on the overburden removal only, and not related to coal production. We do not

expect any significant change in mining companies’ revenue stream as they will comply

with the law.

Considering the common practice, mining contracting companies are the ones having the

human resources to conduct mining activities, including mining plan. This indicates that

there is a requirement to use local/national mining contracting companies, local sub-

contractors, and hire local workers.

In the mining contracts, mining contracting companies do not stand to benefit from the

increases in commodity prices directly. However, higher commodity prices encourge more

mining activities, and vice versa. This would affect the size of overburden, thus benefitting

the mining contracting companies.

The mining contracting activities are now limited to removing the overbuden; and

transportation of minerals and coal. In the past, a mining contracting company involved up

the mining plan. For mineral or coal mining activities, they have to be conducted by the

mining companies themselves.

For the existing contracts, mining companies are given three years to comply with the

Ministerial Decree by September 2012.

We do not expect any significant changes in mining contracting companies’ operations

and revenue stream following the compliance of the new regulation. Mining companies

have control over their workers and equipment, therefore, they’d likely be able to retain

their position.

Two recent major changes in the mining regulations are:

■ Limitation of foreign ownership to 49%, down from 80% previously. This will be applied

for IUP holders and they will be given a 10-year target for completion, starting ‘year 5’

of operation. Contract of work (COW) holders are exempted from this regulation before

the expiry of the COW.

Opportunity to grow for local

mining contracting

companies

There could be change in

contract to comply with the

regulation

But no change in the

activities as mining

contracting companies have

the control over human

resources and equipment

27 September 2012


Figure 21: Divestment schedule

Year Min. Local portion

1st not yet required

2nd not yet required

3rd not yet required

4th not yet required

5th not yet required

6th 20%

7th 30%

8th 37%

9th 44%

10th 51%

Source: Ministry of Energy and Mineral Resources

■ Export tax on raw ores. The government is imposing export tax for 14 raw ores,

excluding coal to discourage raw ores export, prior to the total ban in 2014, as required

by the mining law. The intention of the total ban on ore exports is to encourage mining

companies to have processing facilities in the country.

The threat on the coal sector in relation to government’s regulation would be a limitation

on exports to ensure availability of coal in the domestic market for energy security

purposes. At the moment, the government has applied DMO (domestic market obligation),

which is set on an annual basis. Other two options are limiting the calorific value of coal

which can be exported and export tax. We do not expect the last two to be applied in the

near term.

The industry expectation is that Indonesia’s coal output would reach a plateau of 500 mn

tonnes p.a., otherwise it would be mined at a significantly higher cost considering the

location, distance and difficulties in getting the coal out. This would translate to a higher

strip ratio. Although the coal output would be maintained at 500 mn tonnes p.a., the

amount of overburden could gradually increase.

Longer distance, higher strip

ratio translate to higher

contracts values

27 September 2012


We prefer United Tractors Our prefered stocks are United Tractors and Indika Energy. We have an OUTPERFORM

rating for United Tractors (UNTR.JK) with a target price of Rp28,000/share. The share

price has reflected the downside risk on heavy equipment sales. However, we believe that

the mining contracting activites will remain strong.

We have an OUTPERFORM rating for Indika (INDY.JK) with a target price of

Rp2,700/share. The income is supported primarily by its coal subsidiary, Kideco, which

produces high quality coal with efficient operation and strong balance sheet.

ABM Investama (ABMM.JK) is a smaller mining contracting company, with other

businesses including the power rental, which is probably the largest in the country; two

coal mining areas, and other related services. We rate ABM with a NEUTRAL rating and a

target price of Rp3,800/share. It is part of the Trakindo group, the sole distributor of

Catepillar in Indonesia.

Delta Dunia (DOID.JK) needs to restructure its balance sheet. Although its EBITDA

remains sufficient to service debts, it would need to replace equipment to overcome

operating inefficiency. DOID’s share price collapsed, reflecting the concerns.

Consequently, we rate the stock as NEUTRAL with a target price of Rp315/share.

Figure 22: Positives and negatives

Positives Negatives

ABM Investama In the growing stage, integrated mining related activities

Power business more stable revenue and earnings

Future growth is from two coal mining

A smaller and new player with no track record, need

time to build investors confident

No competitive advantage in mining contracting and coal mining, other than the power rental.

Delta Dunia The second largest mining contracting company with good track record

Acquisition of new heavy equipment should improve the efficiency

Balance sheet issues with net debt to equity of 8x

Double declining depreciation hurts earnings as they have new equipments

Indika Long-term experience in construction, under Tripatra,

and mining contracting under Petrosea, the sixth largest

mining contracting company

Earnings supported by Kideco, a coal mining company with high grade coal, efficient operation and strong balance sheet

Thin top line as they are from mining related services

Major earnings driver below operating profit line

Expertise is at the subsidiaries/affiliates companies

United Tractors The largest mining contracting company

Efficient operation

Strong support from heavy equipment

Good corporate governance

Hit by decline in heavy equipment sales

Coal mining is small and high cost

Source: Credit Suisse

Figure 23: Summary of recommendations

Price TP Upside

Company Ticker Rtg (local) (local) % Comment

ABM Investama ABMM.JK N 3,550 3,800 7% Based on sum of parts, we value the mining contracting

and services at 4x EV/EBITDA; and coal mining at 7x

P/E for 2013, a 30% and 20% discount to the sector

average, respectively.

Delta Dunia Makmur DOID.JK N 250 315 26% Based on EV/EBITDA target of 4x or 30% discount to

the sector average to address the balance sheet risk.

PT Indika Energy Tbk INDY.JK O 1,620 2,700 67% Based on sum of parts valuation with EV/EBITDA

target for mining contracting and services of 6x, and

P/E target of 6x for the coal mining, which is at a 30%

discount to the sector average to reflect the holding

company discount.

United Tractors UNTR.JK O 21,350 28,000 31% Based on SOTP, with FY13 EV/EBITDA target of 7.5x

for heavy equipment, 6.0x for mining contracting

services, and 5.5x for coal mining.


Our top pick is United

Tractors

ABM is a growing company

27 September 2012


Asia Pacific / Indonesia Diversified Metals & Mining

[email protected]

Dian Haryokusumo

62 21 255 37974

[email protected]

ABM Investama

(ABMM.JK / ABMM IJ)

In the growing stage

■ Initiating on ABM Investama with a NEUTRAL rating: We initiate

coverage of ABM Investama (ABMM) with a NEUTRAL rating and Rp3,800

target price, with 7% potential upside. Being a relatively small mining

contracting company with other mining and power services, and coal

operation that has just begun, ABMM has no competitive advantage in the

sector, under a pressurised coal price environment. However, there is a

potential for strong growth in the business in the medium to long term.

■ Diversified business lines: The main contributors to earnings are the

mining contracting activities and power services. Coal mining, which recently

started in two main areas with low-grade coal, will have minimum

contribution for the time being in the low coal price environment. However,

this will be the future growth of the company, in our view. The power rental

business can potentially offset the decline in coal-related activities, as it is a

more sustainable and stable business.

■ Earnings momentum tends to be negative: ABM is a relatively small

company. In a low coal price environment, the company has been affected

more considering that its clients tend to be smaller coal mining companies.

Therefore, we expect disappointing 3Q12 results, which would have negative

sentiment on the share price. However, we remain confident with the

company’s future growth potential despite the short-term slowdown.

■ Key risks: Our Rp3,800 target price is based on sum of the parts; we value

the mining contracting and services at 4x EV/EBITDA and coal mining at 7x

P/E for 2013E, a 30% and 20% discount to the sector average, respectively.

The risks to our valuation and rating are lower-than-expected coal price,

mining contracting volume, and rate.

Share price performance

80

90

100

110

120

3400

3600

3800

4000

Dec-11 Apr-12 Aug-12

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the JSX

COMPOSITE INDEX which closed at 4226.89 on 25/09/12

On 25/09/12 the spot exchange rate was Rp9570./US$1

Performance Over 1M 3M 12M Absolute (%) -1.4 1.4 — Relative (%) -3.4 -6.0 —

Financial and valuation metrics

Year 12/11A 12/12E 12/13E 12/14E Revenue (US$ mn) 753.1 891.3 1,008.9 1,182.2 EBITDAX (US$ mn) 138.2 290.0 341.0 426.4 EBIT (US$ mn) 74.6 184.1 215.3 287.6 Net profit (US$ mn) 47.2 117.1 138.4 197.5 EPS (CS adj.) (US$) 0.02 0.04 0.05 0.07 Change from previous EPS (%) n.a. Consensus EPS (US$) n.a. 0.04 0.07 — EPS growth (%) 190.6 147.9 18.2 42.7 P/E (x) 21.6 8.7 7.4 5.2 Dividend yield (%) 0 0 0 0 EV/EBITDAX (x) 9.8 5.1 4.1 2.8 P/B (x) 3.0 2.2 1.7 1.3 ROE (%) 20.4 29.6 26.4 28.5 Net debt/equity (%) 100.3 102.7 65.9 21.5

Source: Company data, Thomson Reuters, Credit Suisse estimates

Rating NEUTRAL* Price (25 Sep 12, Rp) 3,550.00 Target price (Rp) 3,800.00¹ Upside/downside (%) 7.0 Mkt cap (Rp mn) 9,773,736 (US$

1,021) Enterprise value (US$ mn) 1,488 Number of shares (mn) 2,753.17 Free float (%) 21.8 52-week price range 3,975.0 - 3,375.0 ADTO - 6M (US$ mn) 0.19

*Stock ratings are relative to the relevant country benchmark.

¹Target price is for 12 months.

Research Analysts

Ami Tantri

62 21 2553 7976

[email protected]

Dian Haryokusumo

62 21 255 37974

[email protected]

Contribution by

Anindito Widyanarendra

27 September 2012


Focus charts

Figure 24: Share price performance vs coal price Figure 25: Revenue breakdown In US$ mn

80

85

90

95

100

105

110

115

120

125

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

May-12

Jun-12

Jul-12

Aug-12

Sep-12

ABMM rel perf to JCI Coal Price (RHS)

US$/t

R= 0.67

0

200

400

600

800

1,000

1,200

2009 2010 2011 2012E 2013E 2014E

Mining contracting Coal operation Power solution Others

Source: Bloomberg Source: Company data, Credit Suisse estimates

Figure 26: Overburden removal In mn bcm

Figure 27: Coal production from mining contracting In mn t

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012E 2013E 2014E

-

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012E 2013E 2014E

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 28: Coal production Figure 29: Coal price, mining fee US$

0

1

2

3

4

5

6

2009 2010 2011 2012E 2013E 2014E

TIA MDB

0

20

40

60

80

100

120

140

2009 2010 2011 2012E 2013E 2014E

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Mining fee (RHS)-US$/bcm Newcastle price ASP


27 September 2012


Growth opportunity ABM Investama is a member of the Tiara Marga Trakindo group established in 1970 by

AHK Hamami. Trakindo is the sole authorised dealer for Catepillar (CAT) since 1971 in

Indonesia, and has Freeport Indonesia as its major customer. Trakindo (not listed) now

has 70 branches.

ABM Investama is primarily involved in the mining contracting business, renting power

generators to PLN (mostly diesel-fired) and coal production. It is also involved in

engineering services and integrated logistic (barges).

The company’s main revenue contributors are the mining contracting business and the

power solution; and it intends to grow coal production from two areas—in Kalimantan and

in Aceh—which were recently acquired.

Figure 30: ABM Investama organisation structure

ABM Investama

Cipta Kridatama

Mining Contracting

99.99%

Sumberdaya Sewatama

Power Solutions

99.98%

Meppogen

20%

Nagata Bisma Shakti

99.9%

Pradipa Aryasatya

99.9%

Reswara

Coal Mining

99.99%

Tunas Inti Abadi

99.99%

Pelabuhan Buana Reja

99.99%

Media Djaya Bersama

70.0%

Bara Energy Lestari

99.99%

Mifa Bersaudara

99.99%

Sanggar Sarana Baja

Engineering Services

99.96%

Prima Wiguna Pratama

99.98%

Cipta Krida Bahari

Integrated logistics

99.99%

Baruna Dirga Dharma

99.9%

Alfa Trans Raya

99.9%

Source: Company data

Mining contracting services

The mining contracting service is done by PT Cipta Kridatama (CK), which is the fifth-

largest mining contracting company in terms of overburden removal. The company has a

fleet of 428 pieces of heavy equipment, servicing seven customers, primarily located in

Kalimantan and one in the southern part of Sumatra. The heavy equipment is supplied by

Catepillar, Liebherr, Hitachi and Terex.

With increasing demand for coal and higher production, the company expects growth in

the mining contracting business. The company plans to spend US$119 mn of capex this

year and US$62 mn over the next year to add new equipment for the growth of this

segment.

Power solutions

This is under PT Sumber Daya Sewatama (SS) which has 745 diesel power generators and five gas-fired power generators. These are rented out to PLN, the state-owned power

27 September 2012


company, in areas where PLN has no major power supply. These power generators are portable and can be relocated. The combined capacity is 884MW. The company also intends to take a minority interest in small IPP projects and expand the O&M (operating and management) in power plants.

PLN has a 10,000MW power plant project, of which 4,000MW has been completed. In the meantime, a second 10,000MW power project has also been launched. This is a threat to ABMM’s power solution business. However, the company believes that there are areas in Indonesia which cannot be supplied to by the main grids considering their remote locations.

Coal production

Coal production is under PT Reswara Minergi Hartama (RMH), which owns a 99.99% stake in PT Tunas Inti Abadi (TIA), located in South Kalimantan. Other coal producing areas lie in the southern part of Aceh, under two sub-holdings through PT Media Djaja (MDB)—PT Bara Energi Lestari (BEL) and PT Mifa Bersaudara (MIFA). ABMM owns 70% of MDB, which owns 99.99% stake in both, BEL and MIFA. The combined estimated reserves are 221 mn tonnes and resources are at 561 mn tonnes.

Figure 31: Estimated reserves and resources In mn tonne

Area Reserves Resources

Proved Probable Total Measured Indicated Inferred Total

TIA 13 39 52 32 39 35 106

ADB 7 162 169 18 289 148 455

20 201 221 50 328 183 561


TIA has been producing coal since 2009. Last year, production was 1.7 mn tonne. MDB

areas are still only preparing for their first production, and are expected to start this year

with around 0.5 mn tonne output. This is expected to grow to 5 Mtpa in three years.

There are two IUPs under TIA, one each under BEL and MIFA. The coal quality is low with

calorific value between 3,400kcal/kg and 3,960kcal/kg (GAR). Therefore, the selling price

has been at a significant discount to the benchmark coal price.

In addition to coal production, RMH also owns 99.99% of a port operator (PT Pelabuhan

Buana Reja—PBR). PBR has a 900 metres loading conveyer with capability to transport 5

Mtpa of coal per year. The port has two loading facilities for 300 ft barges (8,000 tonnes),

with stock pile of 120,000 tonnes.

This is an area of growth for the company, especially when coal operations are still at an

early stage. The company plans to spend US$62 mn in 2012 and US$37 mn in 2013 as

capital expenditure for this segment.

Engineering services and integrated logistics

Engineering operations are conducted by PT Sanggar Sarana Baja (SSB) offering various

services under four divisions. The integrated logistics for coal transportation is done by PT

Cipta Krida Bahari (CKB).

Figure 32: Engineering services

Divisions Services

Transport equipment division Designing, manufacturing, and distributing products for transportation and material handling business

Site services division On-site repair, process plant maintenance and construction services

Fabrication division Design and manufacture of process equipment, general fabrication, sie construction and installation

solutions

Re-manufacturing division Salvaging, remanufacturing, and manufacturing of heavy equipment core components


27 September 2012


NEUTRAL rating, TP at Rp3,800 There is a risk for mining contracting activities to be lowered, given the low coal price

environment, as coal companies have become less aggressive in expanding their

production. Contract re-negotitation is possible, although it has not happened yet. The risk

is more for small coal mining companies; no major coal company has announced any

capex delays or production cuts as yet.

We have a NEUTRAL rating for ABMM as it seems the market has too much expectation of

its growth. Our target price is Rp3,800/share based on sum of parts valuation of the mining

contracting and other services, and coal mining business. We value the mining contracting

business and other related services at 4x EV/EBITDA or at a 30% discount to the sector

average considering it is a small mining contracting operation, and for the coal business at

7x P/E target, or at a 20% discount to the sector average. Our target price provides a 7%

potential upside to the current share price, putting the stock into our NEUTRAL territory.

Figure 33: Valuation summary In US$ mn

Description Amount

Mining contracting and other services

EV/EBITDA target (x) 4

EBITDA 2013 296

Enterprise value 1,182

Coal mining

P/E target (x) 7

Earnings 2013 46

Equity value 328

Total 1,510

Net debt 390

Minority interest (2)

Equity value 1,121

Equity value (Rpbn) 10,654

Target price (Rp) 3,800

Upside 7%

Source: Credit Suisse estimates

Risks

The risks to our valuation and rating are lower-than-expected overburden removal coal

price, and coal output. We are confident about the company’s strategy for growth. We

would consider buying the stock if there is any downward correction in the share price.

27 September 2012


ABM Investama ABMM.JK / ABMM IJ Price (25 Sep 12): Rp3,550.00, Rating:: NEUTRAL, Target Price: Rp3,800.00, Analyst: Ami Tantri

Target price scenario

Scenario TP %Up/Dwn Assumptions

Upside

Central Case 3,800.0

0 7.04

Downside

Key earnings drivers 12/11A 12/12E 12/13E 12/14E

Overburden removal (mn bcm)

118.0 126.3 133.8 140.5 Newcastle coal price (USD/t)

123.0 98.0 100.0 110.0 Coal mining production vol (mn t)

2.16 2.50 3.50 5.00 — — — — — — — —

Income statement (US$ mn) 12/11A 12/12E 12/13E 12/14E

Sales revenue 753 891 1,009 1,182 Cost of goods sold 596.0 625.1 711.9 808.9 SG&A 81.7 81.7 81.7 85.8 Other operating exp./(inc.) (62.8) (105.5) (125.8) (138.8) EBITDA 138.2 290.0 341.0 426.4 Depreciation & amortisation 63.6 105.9 125.8 138.8 EBIT 74.6 184.1 215.3 287.6 Net interest expense/(inc.) 21.8 29.0 32.0 26.1 Non-operating inc./(exp.) 0.03 — — — Associates/JV — — — — Recurring PBT 52.8 155.1 183.3 261.5

Exceptionals/extraordinaries — — — — Taxes 5.9 38.8 45.8 65.4 Profit after tax 46.9 116.3 137.5 196.1 Other after tax income — — — — Minority interests (0.3) (0.8) (1.0) (1.4) Preferred dividends — — — — Reported net profit 47.2 117.1 138.4 197.5 Analyst adjustments — — — — Net profit (Credit Suisse) 47.2 117.1 138.4 197.5

Cash flow (US$ mn) 12/11A 12/12E 12/13E 12/14E

EBIT 74.6 184.1 215.3 287.6 Net interest (19.5) (29.0) (32.0) (26.1) Tax paid (5.6) (29.6) (35.0) (50.0) Working capital (70.7) (24.1) (11.3) (21.2) Other cash & non-cash items 38.1 105.9 125.8 138.8 Operating cash flow 16.8 207.3 262.7 329.1 Capex (176.3) (335.0) (186.0) (108.5) Free cash flow to the firm (159.4) (127.7) 76.7 220.6 Disposals of fixed assets — — — — Acquisitions (74.7) — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (24.7) — — — Investing cash flow (275.6) (335.0) (186.0) (108.5) Equity raised 168.2 — — — Dividends paid — — — — Net borrowings 230.7 200.0 — — Other financing cash flow — — — — Financing cash flow 399.0 200.0 — — Total cash flow 140.1 72.3 76.7 220.6 Adjustments — — — — Net change in cash 140.1 72.3 76.7 220.6

Balance sheet (US$ mn) 12/11A 12/12E 12/13E 12/14E

Cash & cash equivalents 204.6 276.9 353.6 574.2 Current receivables 174.3 203.7 230.8 269.6 Inventories 45.8 48.0 54.7 62.2 Other current assets 46.2 46.2 46.2 46.2 Current assets 470.9 574.8 685.2 952.1 Property, plant & equip. 441.8 670.9 731.1 700.8 Investments 6.6 6.6 6.6 6.6 Intangibles 68.9 68.9 68.9 68.9 Other non-current assets 106.3 97.1 86.3 70.9 Total assets 1,094 1,418 1,578 1,799 Accounts payable 153.9 161.4 183.8 208.8 Short-term debt 150.4 150.4 150.4 150.4 Current provisions — — — — Other current liabilities 41.5 41.5 41.5 41.5 Current liabilities 345.7 353.2 375.6 400.6 Long-term debt 393.1 593.1 593.1 593.1 Non-current provisions — — — — Other non-current liab. 17.7 17.7 17.7 17.7 Total liabilities 757 964 986 1,011 Shareholders' equity 337.7 454.9 593.3 790.8 Minority interests 0.1 (0.7) (1.6) (3.0) Total liabilities & equity 1,094 1,418 1,578 1,799

Per share data 12/11A 12/12E 12/13E 12/14E

Shares (wtd avg.) (mn) 2,753 2,753 2,753 2,753 EPS (Credit Suisse) (US$)

0.02 0.04 0.05 0.07 DPS (US$) — — — — BVPS (US$) 0.12 0.17 0.22 0.29 Operating CFPS (US$) 0.01 0.08 0.10 0.12

Key ratios and valuation

12/11A 12/12E 12/13E 12/14E

Growth(%) Sales revenue 52.4 18.4 13.2 17.2 EBIT 114 147 17 34 Net profit 237 148 18 43 EPS 191 148 18 43 Margins (%) EBITDA 18.3 32.5 33.8 36.1 EBIT 9.9 20.7 21.3 24.3 Pre-tax profit 7.0 17.4 18.2 22.1 Net profit 6.3 13.1 13.7 16.7 Valuation metrics (x) P/E 21.6 8.7 7.4 5.2 P/B 3.02 2.25 1.72 1.29 Dividend yield (%) — — — — P/CF 60.7 4.9 3.9 3.1 EV/sales 1.81 1.67 1.40 1.01 EV/EBITDA 9.8 5.1 4.1 2.8 EV/EBIT 18.2 8.1 6.6 4.1 ROE analysis (%) ROE 20.4 29.6 26.4 28.5 ROIC 13.7 17.3 17.0 22.3 Asset turnover (x) 0.69 0.63 0.64 0.66 Interest burden (x) 0.71 0.84 0.85 0.91 Tax burden (x) 0.89 0.75 0.75 0.75 Financial leverage (x) 3.24 3.12 2.67 2.28 Credit ratios Net debt/equity (%) 100 103 66 21 Net debt/EBITDA (x) 2.45 1.61 1.14 0.40 Interest cover (x) 3.4 6.4 6.7 11.0


5.60

5.80

6.00

6.20

6.40

6.60

6.80

7.00

Jul-12 Aug-12 Sep-12

12MF P/E multiple

1.70

1.75

1.80

1.85

1.90

1.95

Jul-12 Aug-12 Sep-12

12MF P/B multiple

Source: IBES

27 September 2012


Asia Pacific / Indonesia Diversified Metals & Mining

[email protected]

Dian Haryokusumo

62 21 255 37974

[email protected]

Delta Dunia Makmur

(DOID.JK / DOID IJ)

Needs balance sheet restructuring

■ Initiate on Delta Dunia Makmur with a NEUTRAL rating: We initiate

coverage of Delta Dunia (DOID) with a NEUTRAL rating and a target price of

Rp315. Although DOID owns Buma, the third-largest mining contracting

company which generates strong EBITDA, we are concerned about the

company’s balance sheet condition with net debt-to-equity of 7x.

■ Downside risks on the mining contracting activities: The recent

investment at Buma level (not listed), the mining contracting subsidiary,

should have improved the efficiency of the operation. However, we have also

heard Buma’s operation to be underperforming which may be because

mining companies change plans or reduce activities. Despite all that, we still

expect the company to generate strong cash flow, which should be more

than sufficient to service its debt.

■ Balance sheet restructuring: Although it has strong EBITDA to service

debt, with net debt-to-equity at 7x, Delta Dunia needs to restructure its

balance sheet, in our view. There is value left for shareholders, however, we

do not expect any dividend payment.

■ Key risks: Our Rp315 target price is based on EV/EBITDA target of 4x for

2013 or 30% discount to the sector average to address the balance sheet

risk. The key risks to our valulation and rating are lower-than-expected

overburden removal, and lower mining contracting rate. We believe the

share price already reflects these risks, and we would be a buyer of this

stock if there will be any balance sheet restructuring.


0

50

100

150

200

0

500

1000

1500

2000

Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12





Performance Over 1M 3M 12M Absolute (%) -7.4 -37.5 -61.5 Relative (%) -9.4 -44.9 -89.0


Year 12/11A 12/12E 12/13E 12/14E Revenue (Rp bn) 6,820.7 8,362.4 9,264.7 10,160.1 EBITDA (Rp bn) 2,043.3 2,533.8 2,630.2 2,564.0 EBIT (Rp bn) 669.2 503.7 292.0 785.6 Net profit (Rp bn) -153.4 -544.4 51.6 236.0 EPS (CS adj.) (Rp) -19.55 -66.82 6.33 28.96 Change from previous EPS (%) n.a. n.m Consensus EPS (Rp) n.a. 22.4 48.0 91.4 EPS growth (%) n.m. n.m. n.m. 357.2 P/E (x) -12.8 -3.7 39.5 8.6 Dividend yield (%) 0 0 0 0 EV/EBITDA (x) 4.2 3.9 3.3 3.0 P/B (x) 2.2 5.2 4.6 3.0 ROE (%) -33.5 -81.8 12.3 41.9 Net debt/equity (%) 690.4 2,017.7 1,481.0 836.0


Rating NEUTRAL* [V] Price (25 Sep 12, Rp) 250.00 Target price (Rp) 315.00¹ Upside/downside (%) 26.0 Mkt cap (Rp bn) 2,042.12 (US$ 0.21) Enterprise value (Rp bn) 9,987 Number of shares (mn) 8,168.49 Free float (%) 59.9 52-week price range 740.0 - 235.0 ADTO - 6M (US$ mn) 0.89



[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Ami Tantri

62 21 2553 7976

[email protected]

Dian Haryokusumo

62 21 255 37974

[email protected]

Contribution by


27 September 2012


Focus charts

Figure 34: Share price performance vs coal price

Figure 35: Mining fee vs coal and oil prices US$/unit

60

70

80

90

100

110

120

130

140

150

-350%

-250%

-150%

-50%

50%

150%

250%

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

DOID rel perf to JCI Coal Price (RHS)

US$/tR= 0.28 R= - 0.14 R= 0.85

Long Term R = - 0.36

60

70

80

90

100

110

120

130

140

2009 2010 2011 2012E 2013E 2014E

1.9

2.0

2.1

2.2

2.3

2.4

2.5

2.6

Coal price US$/t Oil price US$/bbl Unit fee-RHS US$/bcm



Figure 37: Coal production In mn tones

0

50

100

150

200

250

300

350

400

450

500

2001 2003 2005 2007 2009 2011 2013E

0

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10

15

20

25

30

35

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45

50

2001 2003 2005 2007 2009 2011 2013E


Figure 38: Strip ratio x

Figure 39: Mining fee vs cash cost US$/bcm

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

10.0

2001 2003 2005 2007 2009 2011 2013E

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010 2011 2012E 2013E 2014E

Fuel cost Cash COGS Cash opex Mining fee


27 September 2012


Reducing financing costs Delta Dunia (DOID.JK) started business as a property company. It acquired Buma, the

third-largest mining contracting company in Indonesia, and mining contracting has now

become the focus for DOID. As a result of growing coal production in Indonesia, Buma’s

overburden removal has also been growing strongly at 19% CAGR over the past 11 years.

Coal output too has been growing at 16% CAGR during the same period with a strip ratio

of 7x. Delta Dunia’s services cover overburden removal, coal mining, and hauling.

Its customers are major coal mining companies, including Adaro (ADRO.JK), Berau Coal

(BRAU.JK), Bayan (BYAN.JK), Arutmin and KPC under Bumi Resources (BUMI.JK), and

Kideco under Indika (INDY.JK). Buma’s management and man-power came from Pama

(under United Tractor, UNTR.JK). Consequently, their technical know-how is comparable

with Pama.

Figure 40: Customers Figure 41: Strip ratio x

Adaro

14%

Arutmin

10%

Bayan

15%

Berau

27%

Dewa

4%

Kideco

15%

Lanna

4%

Others

11%

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2009 2010 2011 2012

Source: Company data Source: Company data

The robust growth has been achieved by spending significant capex to get additional

equipment and to improve the existing facilities. The company’s operating cash flow is not

sufficient to finance its capex programme. The rights issue last year garnered Rp1.17 tn,

and the company recorded a total debt of Rp8.4 tn and cash of Rp1.9 tn as of 31 Dec

2011, with net debt-to-equity of 7x.

In May 2011, Buma raised US$800 mn bank facility, of which US$750 mn was term-loan

and the remaining on a seven year-term and three year-revolver. The loans carry an

interest of three months LIBOR + 3.75%, stepping down to 3.25% over time. The proceeds

were used to repay US$585 mn SMBC (Sumitomo Mitsui Banking Corporation) syndicated

facility, other bank loans, and finance the capital expenditure of around US$80-90 mn.

With this new loan, all material restrictive covenants from the previous borrowings have

been removed, including the conversion of LBO debt structure to a corporate loan

structure. In addition, it extends the tenor and reduces interest expense.

With such significant debts positions, earnings had been hit by high interest expense. The

company has been reporting net loss over the past three years. However, we believe this

year is the turnaround year for the company following the repayment of the SMBC

syndicated loan facilty. If the company is able to grow by 10-12% this year, we expect that

they will start reporting profit of Rp104 bn, a recovery from net loss of Rp153 bn in FY11.

The company’s monthly operating numbers show increasing activities in coal mining from

both, overburden removal and coal production. However, this also suggests an increasing

Strong growth in overburden

removal with 19% CAGR in

11 years

Servicing major coal mining

companies

High capital requirement

hurt balance sheet and

earnings

Refinancing—to ease

collateral, reduce interest

cost, and balance sheet

risks

2012—the turnaround year,

in our view

Increasing coal mining

activities

27 September 2012


strip ratio. Fuel cost accounts for around 14% of the total cost or 17% of cash costs. This

cost is passed through to the mining companies. Most of the mining companies now buy

their own fuel. Some contracts also contain pre-determined cost escalation payments

other than fuel. Therefore, mining companies take more risk in operation than mining

contracting companies. However, there are some areas such as a longer distance of

hauling that cause inefficiency in the utilisation of the equipments which have to be borne

by the mining contracting companies. The suppliers of heavy equipment include Komatsu,

Catepillar and Hitachi.


Figure 43: Coal production In mn tonne

17.0

19.0

21.0

23.0

25.0

27.0

29.0

31.0

33.0

35.0


2009 2010 2011 2012

2.0

2.2

2.4

2.6

2.8

3.0

3.2

3.4

3.6


2009 2010 2011 2012

Source: Company data Source: Company data

We expect the company to spend capex around US$300 mn this year and US$100 mn p.a.

for maintenance, 2013 onwards. Operating cash flow should improve over time, which

should be sufficient to pay down loan before the seven-year maturity, in our view.

27 September 2012


NEUTRAL rating with TP of Rp315 Although Delta Dunia is among the five largest mining contracting companies with

relatively long-term experience in the sector, we are concerned about the company’s

balance sheet condition. Debt is necessary for the company to replace its old equipment

and increase efficiency.

Despite having a dented debt-to-equity of 7x , the company’s EBITDA should be strong

enough to finance the debt and capex requirement, except for 2012 when the company

plans to spend US$300 mn. But if the capex is delayed, there will be threat to its future

efficiency, considering it is operating inefficient old equipment.

Figure 44: EBITDA, financing cost and capex Rp bn

-

500

1,000

1,500

2,000

2,500

3,000

2010 2011 2012E 2013E 2014E

EBITDA Net financing cost Capex


Our target price of Rp315/share is based on EV/EBITDA target of 4x, which is at a 30%

discount to the sector average after considering that the company’s ability for growth and

efficiency improvement would depend on its capability to raise finance for replacing and

adding new equipment.

Figure 45: Summary of valuation In Rp bn

Description Amount

Target EV/EBITDA 4x

EBITDA 2013 2,630

Enterprise value 10,521

Net debt 7,945

Equity value 2,576

Target price (Rp bn) 315

Upside 26%


Risks

If coal price continues to stay low and there is risk of coal miners to cut production, there is

risk on the company’s average rate and volume and operating cash flow. The annual

interest for the debt is around Rp520 bn, while EBITDA is estimated around Rp2.6 tn.

Balance sheet risks—high

debt level, but EBITDA

sufficient for debt servicing

Risks to our valuation

27 September 2012


Delta Dunia Makmur DOID.JK / DOID IJ Price (25 Sep 12): Rp250.00, Rating:: NEUTRAL [V], Target Price: Rp315.00, Analyst: Ami Tantri



Upside Central Case 315.00 26.00 Downside


Overburden removal (mn bcm)

334.0 375.1 413.8 448.1 Coal getting (mn t) 34.7 39.1 43.1 46.7 Newcastle coal price (USD/t)

123.0 98.0 100.0 110.0 — — — — — — — —

Income statement (Rp bn) 12/11A 12/12E 12/13E 12/14E

Sales revenue 6,821 8,362 9,265 10,160 Cost of goods sold 5,729 7,406 8,493 8,885 SG&A 422.9 452.5 479.3 489.7 Other operating exp./(inc.) (1,374) (2,030) (2,338) (1,778) EBITDA 2,043 2,534 2,630 2,564 Depreciation & amortisation 1,374 2,030 2,338 1,778 EBIT 669.2 503.7 292.0 785.6 Net interest expense/(inc.) 393.3 491.6 491.1 457.3 Non-operating inc./(exp.) (316.2) (738.1) 267.8 (13.6) Associates/JV — — — — Recurring PBT (40.3) (725.9) 68.8 314.7

Exceptionals/extraordinaries — — — — Taxes 113.1 (181.5) 17.2 78.7 Profit after tax (153.4) (544.4) 51.6 236.0 Other after tax income — — — — Minority interests — — — — Preferred dividends — — — — Reported net profit (153.4) (544.4) 51.6 236.0 Analyst adjustments — — — — Net profit (Credit Suisse) (153.4) (544.4) 51.6 236.0

Cash flow (Rp bn) 12/11A 12/12E 12/13E 12/14E

EBIT 669.2 503.7 292.0 785.6 Net interest — — — — Tax paid (374.8) 181.5 (17.2) (78.7) Working capital (37.4) (194.8) (101.9) (180.0) Other cash & non-cash items 635 842 2,115 1,307 Operating cash flow 892 1,333 2,288 1,834 Capex (1,098) (2,800) (939) (935) Free cash flow to the firm (206) (1,467) 1,349 899 Disposals of fixed assets — — — — Acquisitions — — — — Divestments 31.5 — — — Associate investments — — — — Other investment/(outflows) 110.4 — — — Investing cash flow (956) (2,800) (939) (935) Equity raised 1,172 — — — Dividends paid — — — — Net borrowings 283.8 (137.2) — — Other financing cash flow (8.5) — — — Financing cash flow 1,447 (137) — — Total cash flow 1,383 (1,605) 1,349 899 Adjustments — — — — Net change in cash 1,383 (1,605) 1,349 899

Balance sheet (Rp bn) 12/11A 12/12E 12/13E 12/14E

Cash & cash equivalents 1,932 327 1,676 2,576 Current receivables 1,444 1,771 1,962 2,152 Inventories 489.9 633.3 726.3 759.8 Other current assets 511.3 634.3 710.2 760.0 Current assets 4,377 3,366 5,075 6,247 Property, plant & equip. 5,075 5,845 4,446 3,603 Investments 31.2 31.2 31.2 31.2 Intangibles — — — — Other non-current assets 1,319 1,277 1,277 1,277 Total assets 10,803 10,519 10,829 11,158 Accounts payable 1,038 1,341 1,538 1,609 Short-term debt 659.7 659.7 659.7 659.7 Current provisions — — — — Other current liabilities 322.0 416.3 477.4 499.3 Current liabilities 2,019 2,417 2,675 2,768 Long-term debt 7,749 7,612 7,612 7,612 Non-current provisions — — — — Other non-current liab. 95.9 95.9 95.9 95.9 Total liabilities 9,864 10,125 10,383 10,476 Shareholders' equity 938.2 393.7 445.4 681.4 Minority interests 0.001 0.001 0.001 0.001 Total liabilities & equity 10,803 10,519 10,829 11,158


Shares (wtd avg.) (mn) 7,843 8,148 8,148 8,148 EPS (Credit Suisse) (Rp) (19.6) (66.8) 6.3 29.0 DPS (Rp) — — — — BVPS (Rp) 115 48 55 84 Operating CFPS (Rp) 114 164 281 225


12/11A 12/12E 12/13E 12/14E

Growth(%) Sales revenue 17.6 22.6 10.8 9.7 EBIT (35) (25) (42) 169 Net profit 3 (255) 109 357 EPS 15 (242) 109 357 Margins (%) EBITDA 30.0 30.3 28.4 25.2 EBIT 9.8 6.0 3.2 7.7 Pre-tax profit (0.59) (8.68) 0.74 3.10 Net profit (2.25) (6.51) 0.56 2.32 Valuation metrics (x) P/E (12.8) (3.7) 39.5 8.6 P/B 2.17 5.17 4.57 2.99 Dividend yield (%) — — — — P/CF 2.20 1.53 0.89 1.11 EV/sales 1.25 1.19 0.93 0.76 EV/EBITDA 4.17 3.94 3.28 3.02 EV/EBIT 12.7 19.8 29.6 9.8 ROE analysis (%) ROE (33.5) (81.8) 12.3 41.9 ROIC 38.2 4.8 2.8 8.8 Asset turnover (x) 0.63 0.79 0.86 0.91 Interest burden (x) (0.06) (1.44) 0.24 0.40 Tax burden (x) 3.81 0.75 0.75 0.75 Financial leverage (x) 11.5 26.7 24.3 16.4 Credit ratios Net debt/equity (%) 690 2,018 1,481 836 Net debt/EBITDA (x) 3.17 3.14 2.51 2.22 Interest cover (x) 1.70 1.02 0.59 1.72


0

2

4

6

8

10

12

14

16

18

Sep-09 May-10 Jan-11 Sep-11 May-12

12MF P/E multiple

0

2

4

6

8

10

12

Sep-09 May-10 Jan-11 Sep-11 May-12

12MF P/B multiple

Source: IBES

27 September 2012


Asia Pacific / Indonesia

Dian Haryokusumo

62 21 255 37974

[email protected]

PT Indika Energy Tbk

(INDY.JK / INDY IJ)

Undervalued, but higher exposure on coal

■ Initiate coverage on Indika Energy with OUTPERFORM rating: We intiate

coverage on Indika Energy with an OUTPERFORM rating and target price of

Rp2,700. Indika is one of our top picks in the sector as the earnings are

strongly supported by coal mining by Kideco, one of the best coal mining

companies in Indonesia with a prudent management.

■ Coal mining: Largest contributor to earnings—Indika owns 46% of

Kideco, the fourth-largest coal mining company in Indonesia, producing high-

grade coal with efficient operation and a strong balance sheet. Kideco is the

largest contributor to Indika’s earnings. Petrosea is a mining contracting

subsidiary, which also has a 50% stake in Santan Batubara, a small high-

grade coal producer.

■ Catalysts: The earnings momentum tends to be negative with a decline in

coal price in 3Q12. However, we believe this has been priced in, with share

price falling 36% YTD relative to the JCI. The large contribution from coal

mining makes the stock a high-beta one in the mining contracting universe.

■ Looks undervalued: Our target price of Rp2,700 is based on sum of parts

valuation with EV/EBITDA target for mining contracting and services of 6x,

and P/E target of 6x for coal mining, which is at a 30% discount to the sector

average to reflect the holding company’s discount. Despite that, the stock

looks undervalued. Key risks to our rating and valuation are lower-than-

expected overburden removal, lower-than-expected upcoming contracts,

lower coal price and production, and high oil price.


0

50

100

150

200

0

2000

4000

6000






Performance Over 1M 3M 12M Absolute (%) 1.3 -12.9 -29.6 Relative (%) -0.7 -20.3 -57.0


Year 12/11A 12/12E 12/13E 12/14E Revenue (US$ mn) 592.1 764.6 970.8 1,160.3 EBITDA (US$ mn) 277.6 341.6 401.2 508.4 EBIT (US$ mn) 236.8 244.2 289.8 383.0 Net profit (US$ mn) 126.2 135.2 158.7 235.2 EPS (CS adj.) (US$) 0.02 0.03 0.03 0.05 Change from previous EPS (%) n.a. Consensus EPS (US$) n.a. 0.03 0.02 0.03 EPS growth (%) 48.3 7.0 17.4 48.2 P/E (x) 7.0 6.5 5.6 3.8 Dividend yield (%) 4.0 7.4 9.0 13.3 EV/EBITDA (x) 5.2 5.2 4.1 2.7 P/B (x) 1.2 1.0 0.9 0.8 ROE (%) 19.4 16.8 16.9 22.1 Net debt/equity (%) 65.5 84.0 61.8 36.1

Source: Company data, Thomson Reuters, Credit Suisse estimates.

Rating OUTPERFORM* [V] Price (25 Sep 12, Rp) 1,620.00 Target price (Rp) 2,700.00¹ Chg to TP (%) 66.7 Market cap. (Rp mn) 8,440,511 Enterprise value (US$ mn) 1,783 Number of shares (mn) 5,210.19 Free float (%) 36.5 52-week price range 2,950.0 - 1,510.0



[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Ami Tantri

62 21 2553 7976

[email protected]

Dian Haryokusumo

62 21 255 37974

[email protected]

Contribution by


27 September 2012


Focus charts and table Figure 46: Share price performance %

Figure 47: Gross profit contributors FY12 %

60

70

80

90

100

110

120

130

140

150

-200%

-150%

-100%

-50%

0%

50%

100%

150%

200%

250%

Jan-0

9

Ap

r-09

Jul-0

9

Oct-0

9

Jan-1

0

Ap

r-10

Jul-1

0

Oct-1

0

Jan-1

1

Ap

r-11

Jul-1

1

Oct-1

1

Jan-1

2

Ap

r-12

Jul-1

2

INDY rel perf to JCI Coal Price (RHS)

US$/t

R= - 0.58

R= 0.78

R= 0.81

Long Term R = 0.5

Tripatra4%

Petrosea8%

MBSS20%

Coal sales1%

Kideco *65%

Santan Batubara *

2%

Source: Company data, Credit Suisse estimates *Kideco+Santan–equity accounting; Source: Credit Suisse estimates

Figure 48: Petrosea’s overburden removal In mn bcm

Figure 49: Petrosea’s coal production In mn tonne

0

20

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60

80

100

120

140

160

180

200

2008 2009 2010 2011 2012E 2013E 2014E

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2008 2009 2010 2011 2012E 2013E 2014E


Figure 50: Petrosea’s mining fee vs costs US$/bcm

Figure 51: Santan and Kideco In mn tonne

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2009 2010 2011 2012E 2013E 2014E

Fuel cost Cash COGS Cash G&A Mining fee

0

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10

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20

25

30

35

40

2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

Kideco Santan Batubara


27 September 2012


More coal exposure Engineering services and mining contracting

Indika’s main operation is the engineering arm under Tripatra, a wholly owned subsidiary

established in 1973. Tripatra is the leading EPC and O&M services company in Indonesia.

As an engineering company, Tripatra focuses on the energy, oil/gas and coal sectors, with

long-term relationship with major oil companies such as ExxonMobill, Chevron, and Hess.

Tripatra has three subsidiaries and affiliates:

■ Kuala Pelabuhan Indonesia: Tripatra owns 100% equity interest in the company. KPI

provides services covering marine operations, road and transportation, construction

and maintenance.

■ PT Cotrans Asia: Tripatra owns a 45% stake in the company. Cotrans provides

offshore coal transportation and transhipment in the Adang Bay. It has 21 units of tug

boats and 23 barges.

■ PT Sea Bridge shipping: Tripatra owns a 46% equity in the company, which provides

domestic coal transhipment for Kideco. It owns two units of floating facilities.

The mining contracting is conducted by Petrosea (PTRO.JK), which contributes 52% of

Indika’s revenue. We discuss about Petrosea later in this report.

Adding coal assets

Acquisition of MTU

In May 2012, Indika finished the acquisition of an 85% stake in Multi Tambangjaya Utama

(MTU) from Asia Thai Mining Co. Ltd, a coal mining company in Kalimantan, and its coal

rights from International Coal Trading Ltd. The total consideration (at 100% basis) is

US$205 mn, including liabilties and rights.

MTU’s mining area is over 25,000 Ha in Central Kalimantan. It holds third-generation

CCOW since 1997 with production commencing in 2008. The quality is of high-grade with

calorific value around 6,500-7,200 kcal/kg (ADB), and there is also coking coal reserves of

CV around 7,800 kcal/kg (ADB). The facilities are capable of producing and transporting

around 3-5 Mtpa of coal. Production was stopped due to some issues with the local

community. Indika is very confident of handling these issues well, being a local company.

Figure 52: Reserves and resources estimates In mn tonne

Thermal Coking Total

Reserves 31.2 9.4 40.6

Resources 51.6 23.6 75.2

Strip ratio 13.0 17.0

Source: Company data, USGS standard

To acquire a greenfield coal asset

PT Mitra Energi Agung (MEA) has mining area in East Kalimantan. Indika signed a sales

purchase agreement on 21 March 2012 to acquire a 60% stake in MEA from Pacific

Emperor Holdings Ltd. for US$27 mn. MEA holds an IUP license with concession covering

5,000 Ha. The area has low-grade coal with calorific value of around 3,750-4,000 kcal/kg

GAR. The pit is close to the port with an 18 km hauling road, while the transhipment port is

around 50 km away. The initial drilling indicated around 40 mn tonne of reserves and 100

mn tonne of resources with strip ratio of 3-4x.

27 September 2012


Kideco: Cash flow contributor

Indika owns a 46% stake in PT Kideco Jaya Agung (Kideco), the third largest coal

producer in Indonesia which has operations over an average 50,400 Ha in South

Kalimantan. Kideco holds the first-generation of CCOW. The JORC estimates reserves of

651 mn tonne and resources of 1,376 mn tonne as of April 2011. Other shareholders are

Samtan with a 49% stake and PT Muji Inti Utama that holds the remaining 5%.

Figure 53: Reserves and resources JORC estimates In mn tonne

Reserves Resources

Proved Probable Total Measured Indicated Inferred Total

Roto South 91 66 157 106 114 44 264

Roto North 18 18 22 57 79

Roto middle 22 17 39 27 33 62 122

Susubang 16 16 21 7 28

Samarangau 79 342 421 88 570 225 883

Total 192 459 651 221 760 395 1,376


Kideco has been able to grow its production with a 10% CAGR over the past six years

reaching 31.6 mn tonne in 2011. The calorific value of coal is between 4,430 kcal/kg and 5,470

kcal/kg; Kideco’s average selling price is at around 40% discount to the benchmark price.

Figure 54: Coal output In mn tonne

Figure 55: Coal price and ASP US$/t

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

ASP Coal price

Source: Company data, Credit Suisse estimates Source: Company data, Bloomberg, Credit Suisse estimates

Kideco has one of the most efficient coal mining operations. Production has not been

much affected by weather given they have built all-weather roads for the mining area and

connecting the ports.

Kideco is Indika’s largest earnings contributor which has been paying dividend at a

minimum 80% DPR. Kideco has been paying dividend between 88-98% of its profit since

2006.

27 September 2012


Figure 56: ASP vs cash cost US$/t

Figure 57: Markets in 2011

0

10

20

30

40

50

60

70

80

90

2005 2006 2007 2008 2009 2010 2011 2012E 2013E 2014E

ASP Cash cost

Indonesia23%

Korea15%

Taiwan6%

Japan5%

China15%

India8%

Malaysia8%

HK4%

Philippines7%

Thailand6%

Others3%

Source: Company data, Credit Suisse estimates Source: Company data

Petrosea: An expert in coal mining

Indika owned 69.8% of Petrosea (PTRO.JK) after the placement in February 2012; the

company sold 28.75% of Petrosea at Rp36,000/share or US$116 mn. In 2009, Indika had

bought 98.5% of Petrosea for US$120 mn. Consequently, this placement of Petrosea

would add around US$81 mn in profit.

Petrosea is originally an engineering company which has transformed to mining

contracting business, primarily coal, and was first listed at JSX on 21 May 1990. Mining

contracting accounts for 87% of total revenue, up from 49% from three years ago. They

have 29 fleets with capability to move 148 mn bcm of earth per annum. The growth in

mining contracting has been very strong as a result of strong demand for coal. The

company recorded a 30% CAGR in three years. By adding five fleets per annum with total

capital expenditure of around US$60 mn, the company is looking to expand its mining

contracting business.

Petrosea serves major coal mining companies including Bayan, Kideco, its sister-company

under Indika (INDY.JK), Santan Batubara, which Petrosea owns a 50% stake in; and ABN,

the subsidiary of Toba Bara (TOBA.JK, not rated). Bayan is the largest customer.

The company is re-negotiating contracts with ABN due to the recent underperformance.

However, this is likely to be offset by the new contracts from Indika for Kideco and MTU for

next year. The company expects to get around 180-200 mn bcm of overburden for 2013,

with a cut from 175-180 mn bcm to 160 mn bcm this year.

Santan Batubara

Santan Batubara (SB) is 50% owned by Petrosea, with the remaining 50% owned by

Harum Energy (HRUM.JK). SB’s mine area is located in East Kalimantan with estimated

reserves of 17.3 mn tonne and resources of 61.5 mn tonne on JORC resources, while

non-JORC estimates reserves of 30.6 mn tonne and resources of 222.2 mn tonne as of

March 2011. The quality of the coal is medium-grade to high-grade with calorific value of

around 5,500 kcal/kg (GAR).

The first half production of Santan Batubara indicates that the 3 mn tonne target is unlikely

to be achieved due to some mining plan changes. Therefore, we have cut our FY12 output

target to 2 mn tonne. There was some delay in mining activities due to delays in delivery of

equipment at Petrosea. The partner, Harum Energy (HRUM.JK) has hired a local

contractor to start the work, however, we expect that production will be moved forward to

From an engineering

company to mining

contracting

27 September 2012


the next year. Operation in SB should nonetheless be back on track, and so, the volume

target of 3.5 mn tonne could be achieved next year.

Figure 58: Coal production and ASP In million tonnes

Figure 59: ASP vs cash cost US$/tonne

-

20

40

60

80

100

120

-

0.5

1.0

1.5

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2009 2010 2011 2012E 2013E 2014E

Santan output ASP-RHS (US$/t)

30

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50

60

70

80

90

100

110

2009 2010 2011 2012E 2013E 2014E

ASP-RHS (US$/t) Cash cost


Mitra Bahtera Segara Sejati (MBSS): The barge

company

MBSS was incorporated in 1994 and Indika owns a 51% stake. The second largest

shareholder is PT Patin Resources with a 36.5% stake and the rest are held by public

shareholders. The company is an integrated coal transport and logistic service player. Its

customers are primarily major coal mining companies such as Adaro, KPC, Bukit Asam,

Berau Coal and Kideco. Around 95% of the revenue is tied to long-term contracts based

on time charter, freight rate and fixed and variable rate, with contract life between one and

five years for coal barging and two and five years for floating crane/transhipment services.

Figure 60: MBSS barging and transhipment In mn tonne

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012E 2013E 2014E

Barging volume Transhipment


27 September 2012


Cirebon power plant project

Indika owns a 20% stake in Cirebon Electric Power project in West Java. This is a 660MW

coal-fired power plant project which is 98.61% completed, a slight delay from the original

schedule. The project cost around US$850 mn financed by 70/30 debt-to-equity. A loan of

US$595 mn came from Japan Bank for International Cooperation (JBIC) and The Export

Import Bank of Korea (KEXIM) and four other banks. Indika injected around US$52.5 mn

for its 20% stake in January 2010.

Cirebon has a 30-year power purchase agreement with PLN at a price of US$0.0443/kwh,

and the coal cost is passed through to PLN. The plant consumes around 2.4 mn tonne of

coal per annum with calorific value of 4,500 kcal/kg.

27 September 2012


OUTPERFORM, TP of Rp2,700 We have valued Indika’s services business which includes Tripatra, Petrosea’s mining

contracting and transporation, using an EV/EBITDA target of 6x for 2013. For the coal

business, which includes Kideco, Santan Batubara and the newly acquired MTU, we

assume a 30% holding company discount to the sector average P/E target of 9x for 2013

based on a benchmark coal price of US$100/t.

We estimate an equity value of US$1.4 bn, or Rp2,700/share. This provides a 67% upside

to the share price. Indika’s share price has been hit by the decline in coal price and

disappointments with regard to the projects.

Figure 61: Summary of valuation US$ mn

Description Amount

Target EV/EBITDA - contracting (Tripatra, Petrosea + others) - x 6

EBITDA 2013 150

EV for services 901

Target P/E for coal (Kideco, SB, MTU) -X 6

Earning for coal 2013 231

Equity value 1,456

Sub total 2,356

Net debt 628

Minority interest 224

Equity value 1,504

Equity value in Rpbn 14,290

Target price in Rp/share 2,700


We have run a sensitivity analysis to our earnings forecasts and valuation on different coal

price assumptions.

Figure 62: Sensitivity analysis to coal price

INDY.JK ASP (US$/t) Net Income EPS (US$) Up/Down from

base

P/E (x) DPS (US$) Div Yield

FY13E

US$110 80.6 215.2 0.041 36% 4.3 0.02 12%

US$ 100 - Base case 73.3 158.7 0.030 0% 5.9 0.02 9%

US$ 90 65.9 102.6 0.020 -35% 9.1 0.01 6%

US$ 80 58.6 46.6 0.009 -71% 20.0 0.00 3%


Risks

Key risks to our rating and valuation are lower-than-expected overburden removal, lower-

than-expected upcoming contracts, lower coal price and production, and high oil price.

27 September 2012


PT Indika Energy Tbk INDY.JK / INDY IJ Price (25 Sep 12): Rp1,620.00, Rating:: NEUTRAL [V], Target Price: Rp2,700.00, Analyst: Ami Tantri



Upside

Central Case 2,700.0

0 66.67

Downside


Overburden Removal Volume (mn bcm)

116.1 151.8 179.1 202.1 Kideco production volume (mn t)

31.6 34.1 35.0 35.0 Newcastle coal price (USD/t)

123.0 98.0 100.0 110.0 — — — — — — — —

Income statement (US$ bn) 12/11A 12/12E 12/13E 12/14E

Sales revenue 0.6 0.8 1.0 1.2 Cost of goods sold 0.46 0.61 0.77 0.91 SG&A 0.11 0.12 0.13 0.15 Other operating exp./(inc.) (0.04) (0.10) (0.11) (0.13) EBITDA 0.28 0.34 0.40 0.51 Depreciation & amortisation 0.04 0.10 0.11 0.13 EBIT 0.24 0.24 0.29 0.38 Net interest expense/(inc.) 0.07 0.05 0.06 0.05 Non-operating inc./(exp.) (0.01) (0.01) (0.01) (0.01) Associates/JV 0.22 0.21 0.22 0.28 Recurring PBT 0.15 0.19 0.23 0.33

Exceptionals/extraordinaries — — — — Taxes 0.02 0.02 0.02 0.03 Profit after tax 0.14 0.17 0.20 0.29 Other after tax income — 0.08 — — Minority interests 0.01 0.03 0.05 0.06 Preferred dividends — — — — Reported net profit 0.13 0.22 0.16 0.24 Analyst adjustments — (0.08) — — Net profit (Credit Suisse) 0.13 0.14 0.16 0.24

Cash flow (US$ bn) 12/11A 12/12E 12/13E 12/14E

EBIT 0.02 0.03 0.07 0.10 Net interest (0.05) (0.05) (0.06) (0.05) Tax paid (0.02) (0.02) (0.02) (0.03) Working capital (0.03) 0.01 0.00 0.00 Other cash & non-cash items 0.08 0.10 0.11 0.13 Operating cash flow 0.01 0.06 0.10 0.15 Capex (0.15) (0.23) (0.09) (0.09) Free cash flow to the firm (0.14) (0.16) 0.01 0.06 Disposals of fixed assets — — — — Acquisitions — — — — Divestments (0.06) (0.34) — — Associate investments — — — — Other investment/(outflows) 0.13 0.20 0.20 0.26 Investing cash flow (0.09) (0.37) 0.12 0.17 Equity raised — — — — Dividends paid (0.02) (0.04) (0.06) (0.08) Net borrowings 0.24 0.11 (0.06) (0.06) Other financing cash flow (0.0009) — — — Financing cash flow 0.22 0.07 (0.13) (0.14) Total cash flow 0.14 (0.23) 0.09 0.17 Adjustments — — — — Net change in cash 0.14 (0.23) 0.09 0.17

Balance sheet (US$ bn) 12/11A 12/12E 12/13E 12/14E

Cash & cash equivalents 0.38 0.15 0.23 0.41 Current receivables 0.14 0.18 0.23 0.27 Inventories 0.01 0.01 0.02 0.02 Other current assets 0.17 0.17 0.17 0.17 Current assets 0.70 0.51 0.65 0.87 Property, plant & equip. 0.59 0.72 0.69 0.65 Investments 0.36 0.79 0.81 0.84 Intangibles 0.21 0.21 0.20 0.19 Other non-current assets 0.16 0.16 0.16 0.16 Total assets 2.0 2.4 2.5 2.7 Accounts payable 0.10 0.13 0.17 0.20 Short-term debt 0.33 0.50 0.43 0.37 Current provisions — — — — Other current liabilities 0.06 0.08 0.10 0.12 Current liabilities 0.49 0.71 0.71 0.69 Long-term debt 0.61 0.55 0.55 0.55 Non-current provisions — — — — Other non-current liab. 0.05 0.05 0.05 0.05 Total liabilities 1.2 1.3 1.3 1.3 Shareholders' equity 0.7 0.9 1.0 1.1 Minority interests 0.15 0.18 0.22 0.28 Total liabilities & equity 2.0 2.4 2.5 2.7


Shares (wtd avg.) (mn) 5,208 5,210 5,210 5,210 EPS (Credit Suisse) (US$)

0.02 0.03 0.03 0.05 DPS (US$) 0.01 0.01 0.02 0.02 BVPS (US$) 0.14 0.17 0.19 0.22 Operating CFPS (US$) 0.00 0.01 0.02 0.03


12/11A 12/12E 12/13E 12/14E

Growth(%) Sales revenue 42.7 29.1 27.0 19.5 EBIT 48.6 3.1 18.7 32.2 Net profit 48.3 7.1 17.4 48.2 EPS 48.3 7.0 17.4 48.2 Margins (%) EBITDA 46.9 44.7 41.3 43.8 EBIT 40.0 31.9 29.9 33.0 Pre-tax profit 25.8 24.3 23.5 28.4 Net profit 21.3 17.7 16.4 20.3 Valuation metrics (x) P/E 6.98 6.52 5.56 3.75 P/B 1.24 0.99 0.89 0.77 Dividend yield (%) 4.0 7.4 9.0 13.3 P/CF 69.1 13.6 8.8 6.1 EV/sales 2.44 2.33 1.68 1.20 EV/EBITDA 5.21 5.22 4.07 2.75 EV/EBIT 6.11 7.30 5.63 3.65 ROE analysis (%) ROE 19.4 16.8 16.9 22.1 ROIC 18.3 12.9 13.2 17.6 Asset turnover (x) 0.29 0.32 0.39 0.43 Interest burden (x) 0.64 0.76 0.79 0.86 Tax burden (x) 0.89 0.89 0.89 0.89 Financial leverage (x) 2.35 2.23 2.08 1.91 Credit ratios Net debt/equity (%) 65.5 84.0 61.8 36.1 Net debt/EBITDA (x) 2.03 2.64 1.87 1.01 Interest cover (x) 3.17 4.62 5.16 8.05


0

2

4

6

8

10

12

14

16

2008 2009 2010 2011 2012

12MF P/E multiple

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2008 2009 2010 2011 2012

12MF P/B multiple

Source: IBES

27 September 2012



Industrial Machinery

United Tractors

(UNTR.JK / UNTR IJ)

Back to fundamentals

■ Maintain OUTPERFORM. We retain our OUTPERFORM rating on United

Tractors with Rp28,000 target price, as we believe the share price has

reflected the downside risks of lower heavy equipment sales and mining

contracting volumes. Despite the short-term slowdown, we expect to see

growth considering that UNTR’s clients are mostly low-cost coal producers.

■ Benefiting from the growing coal industry. Indonesian coal companies

are amongst the lowest-cost producers, and Indonesia is the largest

contributor to seaborne coal. With demand for coal remaining strong, we

expect to see Indonesia coal output continuing to grow, although there may

be some slowdown in the short term. Being the largest mining contracting

company and heavy equipment supplier, we believe that United Tractors is

well-placed to take the growth opportunity.

■ Downside risks priced in. The share price of UNTR has underperformed

over the past five months on the back of the global economic slowdown, in

our view, worsened by the coal oversupply condition. Our analysis shows

that the share price performance had little correlation with coal price

movement in the past, even during the decline in coal price during the

economic crisis in 2008.

■ SOTP target price at Rp28,000. Our target price of Rp28,000 implies a 6.5x

FY13E EV/EBITDA and 15x FY13E P/E, versus UNTR’s historical peak of

21.3x P/E. Key risks to our rating and valuation are lower-than-expected

overburden removals and lower commodity prices, primarily the coal price.


80

100

120

140

0

10000

20000

30000

40000






Performance Over 1M 3M 12M Absolute (%) -0.2 -2.5 8.4 Relative (%) -2.2 -9.9 -19.1


Year 12/11A 12/12E 12/13E 12/14E Revenue (Rp bn) 55,052.6 58,093.2 68,532.2 82,265.3 EBITDA (Rp bn) 11,041.0 12,405.6 16,160.1 19,793.1 EBIT (Rp bn) 7,615.1 7,133.6 9,077.8 10,760.9 Net profit (Rp bn) 5,900.9 5,405.1 6,913.2 8,088.1 EPS (CS adj.) (Rp) 1,656.58 1,449.03 1,853.35 2,168.31 Change from previous EPS (%) n.a. 0 0 0 Consensus EPS (Rp) n.a. 1,614 1,882 2,154 EPS growth (%) 42.3 -12.5 27.9 17.0 P/E (x) 12.9 14.7 11.5 9.8 Dividend yield (%) 2.2 3.2 3.0 3.8 EV/EBITDA (x) 6.9 6.3 4.8 3.9 P/B (x) 2.9 2.7 2.4 2.0 ROE (%) 27.8 19.5 21.9 22.2 Net debt/equity (%) net cash net cash net cash net cash


Rating OUTPERFORM* Price (25 Sep 12, Rp) 21,350 Target price (Rp) 28,000¹ Upside/downside (%) 31.1 Mkt cap (Rp bn) 79,638.4 (US$ 8.3) Enterprise value (Rp bn) 78,693 Number of shares (mn) 3,730.14 Free float (%) 44.8 52-week price range 33,000.0 - 19,250.0 ADTO - 6M (US$ mn) 17.0



Research Analysts

Dian Haryokusumo

62 21 255 37974

[email protected]

Ami Tantri

62 21 2553 7976

[email protected]

27 September 2012


Focus charts and tables Figure 63: Correlation of share price and coal price Rp

Figure 64: UNTR lead mining contracting business As % total revenue

60

80

100

120

140

160

180

200

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

UNTR price Coal Price (RHS)

US$/tR= 0.22

R= 0.87

R= - 0.62

R= 0.63

Long Term R = 0.20

42%

16%

9%

6% 5% 4% 3%

15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

UNTR DOID Thiess Leighton SIS INDY DharmaHenwa

Others

Source: Bloomberg Source: Company data

Figure 65: Indonesia coal output continues to go up mn tonne

Figure 66: … along with increase of overburden mn bcm

-

50

100

150

200

250

300

350

400

450

500

2007 2008 2009 2010 2011 2012E 2013E 2014E

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2009 2010 2011 2012E 2013E 2014E

Source: MEMR, Credit Suisse estimates Source: Credit Suisse estimates

Figure 67: UNTR heavy equipment sales Figure 68: Mining contracting overburden

300

400

500

600

700

800

900

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12

units

45

50

55

60

65

70

75

80

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

Jul-12

Sep-12

Nov-12

mn bcm

Source: Company data, Credit Suisse estimates, Bloomberg Source: Company data, Credit Suisse estimates, Bloomberg

27 September 2012


Back to fundamentals We have seen a decline in heavy equipment sales and a soft performance of the mining

contracting business as coal mining companies tend to lower their strip ratio during a low

coal price environment. However, we have not heard of any major coal mining companies

re-negotiating contracts with their mining contracting companies. With a 25% decline in

share price relative to JCI YTD, we believe the concerns have been priced in. We see that

the downside risk is limited from the current level.

Our analysis shows that United Tractors’ share price has had a long-term correlation of 0.2

with coal price movements. Over the past five months, the correlation has however been

high at 0.8. Even during the economic crisis in 2008, when coal price fell from US$190 to

US$60 in seven months, the correlation was only 0.22.

With coal price likely to stay at the current level (US$90/t) for some time, considering the

oversupply situation, it is time to look at the fundamentals. Indonesia is the largest

contributor to the seaborne coal market with around 40% share. Indonesian coal mining

companies are among the lowest-cost coal producers. We expect coal output from

Indonesia to continue to grow by around 7% p.a.

Figure 69: Correlation of share price performance and

coal price Rp

Figure 70: Correlation of relative performance and coal

price

60

80

100

120

140

160

180

200

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

UNTR price Coal Price (RHS)

US$/tR= 0.22

R= 0.87

R= - 0.62

R= 0.63

Long Term R = 0.20

60

80

100

120

140

160

180

200

-50%

0%

50%

100%

150%

200%

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

UNTR rel perf to JCI Coal Price (RHS)

US$/t

R= 0.02

R= 0.84

R= - 0.65

Long Term R = 0.15

Source: Bloomberg Source: Bloomberg

Heavy equipment

The decline in heavy equipment sales was primarily due to mining companies cutting

down their capital expenditure programmes. Although United Tractors still showed strong

heavy equipment sales up to May 12, we saw the slowdown start to take effect in June 12

with heavy equipment sales volume declining by 35% MoM and 32% YoY.

As expected, UNTR’s August heavy equipment sales volume continued to soften by 32%

YoY (-flat MoM) to 402 units, partly also due to tight competition arising from the impact of

oversupply of Chinese machineries for the 20 tonne excavator type, which is normally

used for non-mining. This brings 8M12 sales volume down 11% YoY to 5,035 units. The

company’s official target for heavy equipment sales still hovers around 8,500 units,

although it believes that it is challenging. Our full-year estimate of 7,652 units assumes an

average of around 650 units for the remaining four months.

Mining companies have cut capex programmes, primarily on heavy equipment. However,

they will need to replace their equipments sooner or later. We also expect coal production

27 September 2012


to continue to grow in Indonesia. Consequently, we still expect to see growth in terms of

heavy equipment demand from the current low levels.

Mining contracting

Pama’s August coal production volume dropped 4% MoM (flat YoY), while overburden

rose 3% MoM (down 2% YoY). YTD coal production and overburden volumes rose 7-8%

YoY with a stripping ratio at 9.2x. We expect 5% YoY growth for this year’s coal production

and overburden from UNTR’s mining contracting division, which implies coal production

with monthly average of 7.8 mn tonnes, and 69.9 mn bcm of average monthly overburden

for the next four months.

Figure 71: Pama customer’s overburden

Overburden by customers Total company Done by PAMA % of overburden done by PAMA

in mn bcm 2009 2010 2011 2009 2010 2011 2009 2010 2011

Adaro 193 239 281 84 91 124 43% 38% 44%

Indominco 182 217 178 144 139 160 79% 64% 90%

KPC 442 413 472 79 97 113 18% 23% 24%

Kideco 158 170 220 80 80 95 51% 47% 43%

Jembayan 82 99 96 70 87 84 85% 88% 88%

Trubaindo 61 75 83 45 50 64 75% 67% 77%

Others n.a. n.a n.a 96 107 155 n.a. n.a. n.a.

Total n.a. n.a. n.a. 598 652 796 n.a. n.a. n.a.


Mining

UNTR’s coal sales volume in August rose 27% MoM and 73% YoY, causing 8M12

volumes to rise 42% YoY to 4.1 mn tonnes. We expect this year’s coal sales volume at

6.2 mn tonne, in line with the company’s guidance.

The company, through its subsidiary Tuah Turangga Agung (TTA), has completed

acquisition of 100% shares in Borneo Berkat Makmur (BBM), which currently owns 60%

shares of Piranti Jaya Utama (PJU). The acquisition is estimated at around US$51 mn, to

be part-financed through internal cash and the remaining from the proceeds from the

rights issue last year. PJU owns 4,800 Ha green field concession in Kapuas, Central

Kalimantan. The coal reserve is estimated to reach around 44-48 mn tonnes with 5,400

Kcal of expected production in 2014.

27 September 2012


OUTPERFORM with TP Rp28,000 United Tractors is our top pick in the sector as it is the largest mining contracting company

in Indonesia and a leading player in the heavy equipment business. We believe the stock

has priced in the downside risks on heavy equipment sales and short-term slowdown in

mining contracting. However, we still expect coal output to continue growing in Indonesia,

given the low cost and being the largest supplier of seaborne coal. Considering that, we

believe the company is well-placed to grow.

Our Rp28,000 target price is based on sum of the parts of UNTR’s business based on

EV/EBITDA targets for 2013 of 7.5x for construction machinery, 6x for mining contracting

and 5.5x for coal mining operations. At Rp28,000, the stock implies 6.5x FY13E

EV/EBITDA, and 15x FY13E P/E versus UNTR's historical peak of 21.3x P/E.

Figure 72: UNTR sum of the parts valuation

EV/EBITDA 13E EBITDA EV

X Rp bn Rp bn

Construction machinery 7.5 5,284 39,632

Mining contracting 6.0 9,584 57,506

Coal Mining 5.5 1,292 7,103

Total EV 104,241

Net Debt/(Cash) (968)

Associate value 329

Minority interests 1,522

Equity Value 104,016

No of shares 3730

Calculated TP 28,000


27 September 2012


United Tractors UNTR.JK / UNTR IJ Price (25 Sep 12): Rp21,350, Rating:: OUTPERFORM, Target Price: Rp28,000, Analyst: Dian Haryokusumo



Upside 42,200.

00 97.66

Central Case 28,000.

00 31.15

Downside 20,671.

00 (3.18)


Construction machinery volume (units)

8,467 7,652 8,614 10,237 Coal production volume (mn tonnes)

86.7 91.0 101.0 116.2 Overburden (bcm) 792 831 923 1,061 Coal sales volume (mn tonnes)

3.45 3.62 3.80 3.99 — — — —

Income statement (Rp bn) 12/11A 12/12E 12/13E 12/14E

Sales revenue 55,053 58,093 68,532 82,265 Cost of goods sold 44,859 48,009 56,014 67,660 SG&A 2,578 2,950 3,441 3,844 Other operating exp./(inc.) (3,426) (5,272) (7,082) (9,032) EBITDA 11,041 12,406 16,160 19,793 Depreciation & amortisation 3,426 5,272 7,082 9,032 EBIT 7,615 7,134 9,078 10,761 Net interest expense/(inc.) 38.8 16.7 (9.4) 129.9 Non-operating inc./(exp.) 208.3 13.6 32.9 38.9 Associates/JV — — — — Recurring PBT 7,785 7,130 9,120 10,670 Exceptionals/extraordinaries — — — — Taxes 1,885 1,727 2,208 2,584 Profit after tax 5,900 5,404 6,912 8,086 Other after tax income — — — — Minority interests (1.4) (1.3) (1.6) (1.9) Preferred dividends — — — — Reported net profit 5,901 5,405 6,913 8,088 Analyst adjustments — — — — Net profit (Credit Suisse) 5,901 5,405 6,913 8,088

Cash flow (Rp bn) 12/11A 12/12E 12/13E 12/14E

EBIT 7,615 7,134 9,078 10,761 Net interest — — — — Tax paid (1,885) (1,727) (2,208) (2,584) Working capital 1,104 (225) (1,283) (1,506) Other cash & non-cash items 3,606 5,287 7,117 9,073 Operating cash flow 10,440 10,469 12,703 15,744 Capex (5,648) (9,949) (9,232) (10,949) Free cash flow to the firm 4,792 520 3,471 4,795

Disposals of fixed assets — — — — Acquisitions — — — — Divestments — — — — Associate investments — — — — Other investment/(outflows) (2,017) (131) (1,020) (1,519) Investing cash flow (7,665) (10,080) (10,252) (12,468) Equity raised — — — — Dividends paid (1,697) (2,586) (2,369) (3,030) Net borrowings — — — — Other financing cash flow 4,530 200 1,353 1,705 Financing cash flow 2,832 (2,386) (1,016) (1,325) Total cash flow 5,608 (1,997) 1,436 1,951 Adjustments 184.4 — — — Net change in cash 5,792 (1,997) 1,436 1,951

Balance sheet (Rp bn) 12/11A 12/12E 12/13E 12/14E

Cash & cash equivalents 7,135 5,139 6,574 8,525 Current receivables 9,833 10,376 12,240 14,693 Inventories 7,129 7,630 8,902 10,753 Other current assets 1,528 1,647 2,013 2,434 Current assets 25,626 24,791 29,730 36,406 Property, plant & equip. 13,670 18,340 20,484 22,394 Investments 616.0 650.1 766.9 920.5 Intangibles — — — — Other non-current assets 6,528 6,889 8,127 9,755 Total assets 46,440 50,671 59,107 69,475 Accounts payable 10,303 11,027 12,866 15,541 Short-term debt 1,843 1,382 1,780 2,260 Current provisions — — — — Other current liabilities 2,783 3,031 3,476 4,254 Current liabilities 14,930 15,440 18,121 22,054 Long-term debt 1,835 2,321 2,611 3,021 Non-current provisions — — — — Other non-current liab. 2,171 2,415 3,011 3,633 Total liabilities 18,936 20,177 23,743 28,708 Shareholders' equity 26,320 29,182 33,842 39,013 Minority interests 1,183 1,312 1,522 1,754 Total liabilities & equity 46,440 50,671 59,107 69,475


Shares (wtd avg.) (mn) 3,562 3,730 3,730 3,730 EPS (Credit Suisse) (Rp) 1,657 1,449 1,853 2,168 DPS (Rp) 476 693 635 812 BVPS (Rp) 7,389 7,823 9,073 10,459 Operating CFPS (Rp) 2,931 2,807 3,406 4,221


12/11A 12/12E 12/13E 12/14E

Growth(%) Sales revenue 47.5 5.5 18.0 20.0 EBIT 47.5 (6.3) 27.3 18.5 Net profit 52.4 (8.4) 27.9 17.0 EPS 42.3 (12.5) 27.9 17.0 Margins (%) EBITDA 20.1 21.4 23.6 24.1 EBIT 13.8 12.3 13.2 13.1 Pre-tax profit 14.1 12.3 13.3 13.0 Net profit 10.7 9.3 10.1 9.8 Valuation metrics (x) P/E 12.9 14.7 11.5 9.8 P/B 2.89 2.73 2.35 2.04 Dividend yield (%) 2.23 3.25 2.97 3.80 P/CF 7.28 7.61 6.27 5.06 EV/sales 1.39 1.35 1.14 0.94 EV/EBITDA 6.94 6.34 4.82 3.89 EV/EBIT 10.1 11.0 8.6 7.2 ROE analysis (%) ROE 27.8 19.5 21.9 22.2 ROIC 26.1 20.0 21.8 22.7 Asset turnover (x) 1.19 1.15 1.16 1.18 Interest burden (x) 1.02 1.00 1.00 0.99 Tax burden (x) 0.76 0.76 0.76 0.76 Financial leverage (x) 1.69 1.66 1.67 1.70 Credit ratios Net debt/equity (%) (11.0) (3.1) (4.8) (6.4) Net debt/EBITDA (x) (0.27) (0.08) (0.10) (0.13) Interest cover (x) 196 427 (962) 83

Source: Company data, Thomson Reuters, Credit Suisse estimates.

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012

12MF P/E multiple

0

1

2

3

4

5

6

7

2007 2008 2009 2010 2011 2012

12MF P/B multiple

Source: IBES

27 September 2012


Companies Mentioned (Price as of 25 Sep 12)

ABM Investama (ABMM.JK, Rp3,550.00, NEUTRAL, TP Rp3,800) Anglo American plc (AAL.L, 1888p, NEUTRAL, TP 2,200.00p) BHP Billiton Ltd. (BHP.AX, A$33.25, NEUTRAL, TP A$35.00) Caterpillar, Inc. (CAT, $87.01, OUTPERFORM, TP $117.00) China Coal Energy Co. (1898.HK, HK$7.11, OUTPERFORM [V], TP HK$8.50) China Shenhua Energy Company Ltd. (1088.HK, HK$29.85, OUTPERFORM, TP HK$38.00) Clough (CLO.AX, A$0.72, OUTPERFORM, TP A$0.97) Delta Dunia Makmur (DOID.JK, Rp250.00, NEUTRAL, TP Rp315) Downer EDI (DOW.AX, A$3.66, OUTPERFORM, TP A$4.10) Leighton Holdings (LEI.AX, A$16.53, NEUTRAL, TP A$17.60) Peabody Energy Corp. (BTU, $22.94, OUTPERFORM [V], TP $29.00) Petrosea Tbk (PTRO.JK, Rp1620, NOT RATED) PT Adaro Energy Tbk (ADRO.JK, Rp1,500.00, NEUTRAL [V], TP Rp1,600.00) PT Indika Energy Tbk (INDY.JK, Rp1,620.00, OUTPERFORM, TP Rp2,700) PT Indo Tambangraya Megah (ITMG.JK, Rp42,050.00, NEUTRAL [V], TP Rp38,000.00) PT Tambang Batubara Bukit Asam Tbk (PTBA.JK, Rp16,250.00, OUTPERFORM, TP Rp19,000.00) Rio Tinto (RIO.AX, A$53.97, OUTPERFORM, TP A$70.00) Transfield Services Ltd. (TSE.AX, A$1.78, NEUTRAL, TP A$2.05) UGL Ltd. (UGL.AX, A$10.60, OUTPERFORM, TP A$13.00) United Tractors (UNTR.JK, Rp21,350.00, OUTPERFORM, TP Rp28,000.00) Whitehaven Coal (WHC.AX, A$2.91, OUTPERFORM, TP A$4.40) Yanzhou Coal Mining Co. (1171.HK, HK$11.54, UNDERPERFORM [V], TP HK$7.10)

Disclosure Appendix Important Global Disclosures

Ami Tantri & Dian Haryokusumo each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names.

3-Year Price, Target Price and Rating Change History Chart for ABMM.JK

ABMM.JK Closing

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O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

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3-Year Price, Target Price and Rating Change History Chart for DOID.JK

DOID.JK Closing

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3-Year Price, Target Price and Rating Change History Chart for INDY.JK

INDY.JK Closing

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13-Apr-11 4000 5400 O X

30-Jun-11 3850 5000

15-Sep-11 2875 3900

18-Apr-12 2450 NC

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3-Year Price, Target Price and Rating Change History Chart for UNTR.JK

UNTR.JK Closing

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2-Nov-09 14850 18500

27-Nov-09 14600 20700

13-Jan-10 17750 21500

1-Mar-10 17150 23000

21-Apr-10 19800 24000

3-May-10 19300 23000

30-Jul-10 20150 22400

11-Nov-10 23450 28000

22-Jun-11 23500 30000 X

28-Jul-11 27150 37500

28-Sep-11 21950 30000

28-Oct-11 25200 31500

30-Jan-12 27850 33300

27-Feb-12 27350 34000

25-Apr-12 30450 N

24-May-12 25250 29000

22-Jun-12 21700 25700

29-Jun-12 21350 24500

25-Jul-12 X

26-Jul-12 20750 23500 X

31-Aug-12 20050 23000

18-Sep-12 22450 28000 O

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The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities.

Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

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Global Ratings Distribution Outperform/Buy* 44% (52% banking clients) Neutral/Hold* 42% (50% banking clients) Underperform/Sell* 11% (39% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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See the Companies Mentioned section for full company names. Price Target: (12 months) for (ABMM.JK) Method: Our target price of Rp3,800 for ABM Investama is based on sum-of-the-parts. We value mining contracting and services at 4x EV/EBITDA, and coal mining at 7x P/E for 2013-a 30% and 20% discount to the sector average, respectively. Risks: Risks that could cause the share price to diverge from out target price of Rp3,800 for ABM Investama include a lower-than-expected coal price, mining contracting volume, and rate. Price Target: (12 months) for (DOID.JK) Method: Our target price of Rp315 for Delta Dunia Makmur is based on EV/EBITDA target of 4.2x for 2013, or 30% discount to the sector average to address the balance sheet risk. Risks: Risks that could cause the share price to diverge from our target price of Rp315 for Delta Dunia Makmur include: a lower-than-expected overburden removal, and a lower mining contracting rate. Price Target: (12 months) for (INDY.JK) Method: Our Rp2,700 target price for PT Indika Energy Tbk is based on sum of parts valuation with EV/EBITDA target for mining contracting services of 6x, and P/E target of 6x for the coal mining, which is at a 30% discount to the sector to reflect the holding company discount.

27 September 2012


Risks: Risks that could impede achievement of our Rp2,700 target price for PT Indika Energy Tbk include: lower than expected overburden removal, lower than expected upcoming contracts, lower coal price and production, and high oil price. Price Target: (12 months) for (UNTR.JK) Method: Our 12-month target price of Rp28,000/share for United Tractor is based on sum-of-the-parts valuations. We have applied 7.5x FY13E EV/EBITDA (enterprise value divided by earnings before interest, tax, depcreciation and amortisation) multiples for its construction machinery, 6.0x FY13E EV/EBITDA multiple for mining contracting, and 5.5x FY13E EV/EBITDA multiple for mining business. We have then deducted the net debt from the enterprise value (EV) (on a consolidated basis) and added associate income to derive the equity value. The implied multiples are 15.0x FY13E price to earnings ratio (P/E) and 6.5x EV/EBITDA. Risks: Key risks to our Rp28,000 target price for United Tractors include changes in government policy, and implementation thereof, on infrastructure projects, fluctuations in the Rp:US$ exchange rate and fluctuations in the commodity prices of coal, palm oil and crude oil and petroleum products.

Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. The subject company (ABMM.JK, INDY.JK) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (ABMM.JK, INDY.JK) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (ABMM.JK, INDY.JK, UNTR.JK) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (ABMM.JK, DOID.JK, INDY.JK, UNTR.JK) within the past 12 months.

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27 September 2012


Equity Research

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