Thermal coal sector. Indonesia Industry Focus. The current rally has legs. DBS Group Research. Equity 19 Jan 2018 JCI : 6,472.70

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1 Indonesia Industry Focus Thermal coal sector Refer to important disclosures at the end of this report DBS Group Research. Equity 19 Jan 2018 The current rally has legs Coal stocks posted a good start and they are poised to rise even further Upside still appealing valuation remains undemanding at 9.0x FY18 PE 8%-15% higher earnings estimates on the back of new coal price benchmark assumption ADRO and ITMG remain our pick for Indo coal sector Raising coal price forecast to US$75 per ton. We raise our coal price forecast to US$75 per ton in 2018/2019 as we expect the current supply tightness to sustain longer than previously expected. Beyond the weather issue, we see a structural change in global supply in the last three years in light of 1) aggressive efforts to boost efficiency among the surviving coal miners will deplete their coal reserves, and 2) steady flow of coal-fired power plant projects from ASEAN countries. We see upside risk to consensus earnings forecasts. Higher coal prices prompted us to raise our coal universe earnings forecasts by 8%-15%. Our 2018 earnings forecast is now ahead of consensus, mainly due to our expectations of vastly better profitability for coal miners in view of the higher ASP and overburden management prospects that can sufficiently offset higher fuel costs in Higher target prices, but valuations are still in check. Stronger profitability and earnings performance spurred coal stocks to re-rate to above 12.0x 2018 PE, which is still below the pre-crisis level in Besides improving earnings, higher coal prices can also raise the estimated mining reserves life thus boosting their enterprise values and target prices. Adaro (ADRO) and Indo Tambang (ITMG) are the best plays amid coal price uptrend. We retain our top picks of ADRO and ITMG. We like ADRO s under-explored coking coal mining business which can potentially deliver a gross profit margin that is 50% higher than that of its thermal coal unit. We like ITMG s net cash balance sheet and high share liquidity. Plus, we also believe that the market has yet to price the upside potential for ITMG s coal reserves life ex. acquisition arising from the coal price uptrend. In our view, ITMG is the best play to take advantage of the coal price uptrend for generating dazzling revenue growth. JCI : 6, Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com STOCKS Newcastle coal price benchmark trend (US$ per ton) Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18F 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F Source: Bloomberg Finance L.P., DBSVI Global coal annual supply/deficit trend in last 20 years Source: BP statistics, EIA, DBSVI Newcastle coal price (US$/ton) Surplus /(deficit) mn tons mth Price Mkt Cap Target Performance (%) Rp US$m Price Rp 3 mth 12 mth Rating Adaro Energy 2,170 5,198 2, BUY Tambang Batubara Bukit 3,040 2,624 3, BUY Indo Tambangraya Megah 25,825 2,185 29, BUY Source: DBSVI, Bloomberg Finance L.P. Closing price as of 18 Jan F 2018F 2019F ed: CK / sa:ma, PY, CS

2 Industry Focus Thermal coal sector ADRO and ITMG remain our picks strong performance to persist in 2018 Valuations still undemanding, despite strong share price performances Coal stocks posted a good start in 2018 and we think that this is just the beginning. The average valuation of the coal sector is reasonable at 9.0x FY18F PE, which is still lower than its fiveyear average of 15.0x. Moreover, coal companies are expected to enjoy earnings growth of 11%-15% this year after a broadbased earnings recovery last year. Following our earnings revision, we now expect about 20% potential upside from the current share price levels to in the next leg of rally. Positive coal price trend to support share price performance The short-term catalysts will be the 4Q17 results announcements and 2018 coal pricing negotiations that will take place in 1Q18. We believe the coal miners will post a strong finish in 2017, with their strong earnings performance to persist in 2018 on the back of strong coal prices and controllable cash cost despite expectations of higher fuel costs. Coal miners plan to keep their coal output conservative. This will be supported by buoyant coal prices, which can help boost earnings without the need to raise coal output, in our view. Moreover, coal stocks will also boosted by the positive coal price sentiment. In view of the seasonally low production period for coal miners in 1Q18, we believe Newcastle coal price benchmark will rise above US$90 per ton. The high coal prices in 1Q18 will benefit the coal miners bargaining power in pricing negotiations in 2018 and this should translate into continuously strong earnings growth momentum. Revising up earnings forecast We bump up our earnings forecasts by 8%-15% in the wake of higher ASP, though we now assume higher fuel costs and mining contracting fees to be conservative. Our earnings are still higher than consensus forecasts, which is mainly due to our bullish view of the sector s earnings performance moving ahead which we believe will be the key share price catalyst in Peers comparison Market Cap Net Income Return on Average PE (Pre-Ex) Dividend M argin (%) Equity (ROAE) % (X) Yield % Companies (USDm) 16 A 17 F 18 F 19 F 16 A 17 F 18 F 19 F 16 A 17 F 18 F 19 F 16 A 17 F 18 F 19 F Adaro Energy (ADRO IJ) 5, Indo Tambangraya Megah (ITMG IJ ) 2, Tambang Batubara Bukit Asam (PTBA IJ ) 2, Source: DBSVI Page 2

3 Industry Focus Thermal coal sector ADRO s forward PE band ITMG s forward PE band Source: Bloomberg Finance L.P., DBSVI Source: Bloomberg Finance L.P., DBSVI PTBA s forward PE band Source: Bloomberg Finance L.P., DBSVI ADRO s earnings revision summary 2017F 2018F 2019F Old New Changes Old New Changes Old New Changes Revenue (US$ m) 3,101 3,101 0% 3,273 3,517 7% 3,500 3,761 7% Gross profit (US$ m) 1,154 1,154 0% 1,206 1,358 13% 1,247 1,409 13% Operating profit (US$ m) % 1,026 1,164 14% 1,054 1,202 14% EBITDA (US$ m) 1,231 1,231 0% 1,281 1,419 11% 1,316 1,464 11% Net profit (US$ m) % % % Production (m tons) % % % ASP (US$ per ton) % % % Cash cost per ton (US$ per ton) % % % SG&A % sales -6% -6% 0% -6% -6% 0% -6% -6% 0% Source: DBSVI Page 3

4 Industry Focus Thermal coal sector ITMG s earnings revision summary 2017F 2018F 2019F Old New Changes Old New Changes Old New Changes Revenue (US$m) 1,703 1,703 0% 1,842 1,923 4% 1,942 2,033 5% Gross profit (US$m) % % % EBITDA (US$m) % % % Net profit (US$m) % % % Production volume (m ton) % % % ASP (US$ per ton) % % % Cash cost per ton (US$/ton) % % % Source : Company, DBSVI Earnings revision summary (PTBA) 2017F 2018F 2019F Old New Changes Old New Changes Old New Changes Revenue (US$m) 16,875 16,875 0% 18,742 20,678 10% 20,451 22,593 10% Gross profit (US$m) 5,498 5,498 0% 6,040 6,771 12% 7,181 8,398 17% EBITDA (US$m) 4,298 4,298 0% 4,694 5,250 12% 5,702 6,726 18% Net profit (US$m) 3,235 3,235 0% 3,592 4,023 12% 4,430 5,214 18% Production volume (m ton) % % % ASP (US$ per ton) % % % Cash cost per ton (US$/ton) % % % Source : Company, DBSVI Page 4

5 Industry Focus Thermal coal sector Raising coal price benchmark to US$75 per ton in 2018 and beyond We raise our average coal price forecast to US$75 per ton from US$65 per ton from , followed by US$70 per ton from 2025 onwards (vs US$65 per ton previously). We expect slower-than- expected supply expansion due to structural changes affecting global coal miners, especially the ones domiciled in Indonesia. Newcastle coal price benchmark trend (US$ per ton) Newcastle coal price (US$/ton) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18F 2Q18F 3Q18F 4Q18F 1Q19F 2Q19F 3Q19F 4Q19F Source: Bloomberg Finance L.P., DBSVI While Coal demand has limited room to expand at double digits in view of the efforts to reduce pollution, we still believe coal will play a significant role in the global energy mix. The phasing out of coal in the global energy mix will be gradual and slow, in our view, as substituting coal with gas is harder than we previously expected on the need to remove coal boiler facilities and invest further in gas piping infrastructure. Due to the steady demand outlook, the absence of significant output expansion this year will keep coal supply and demand tight. As such, we think the currently buoyant coal prices will sustain longer than we previously anticipated. Coal sector investment to sustain this year, amid soft coal output expansion target Indonesia coal miners still in defensive mode Albeit we have not seen any consolidation among coal miners in Indonesia, we believe the government s warning that Indonesia coal production could come in at only 400m tons by 2020 vs. its 2018 output target of 420m tons, suggests that Indonesia s coal production is changing structurally. The efficiency-enhancing efforts undertaken by coal miners back in have led to the decline in exploration activities to find new coal reserves, which could put their profitability and mineable coal resources at risk. To jump start the production momentum, it involves more than just restarting the idle machineries and then digging the soil for coal. The miners need to reorder the divested machineries, rehabilitate the unused soil and regain the confidence of bankers to provide financing for both aforementioned activities. We anticipate that it will be a tall order for miners to regain their productivity levels. However, we can also see that the miners are still cautious about ramping up their operations aggressively, like what they did four years ago. This means that coal miners have not sufficiently increased their output to help the rebalancing of high coal prices. UNTR s monthly Pamapersada, which publishes the mining contractor s subsidiary numbers, also does not reveals any major changes in its clients behaviour. UNTR s mining clients strip ratio implies Indonesia miners are still on defensive stance. UNTR s overburden removal and coal production volume Global coal annual supply/deficit trend in last 20 years Surplus /(deficit) mn tons Source: BP statistics, EIA, DBSVI F 2018F 2019F Jan 12 Apr 12 Jul 12 Oct 2012 Jan 13 Apr 13 Jul 13 Oct 2013 Jan 14 Apr 14 Jul 14 Oct 2014 Jan 15 Apr 15 Jul 15 Oct 2015 Jan 16 Apr 16 Jul 16 Oct 2016 Jan 17 Apr 17 Jul 17 Oct 17 Source: Company, DBSVI Monthly coal production volume (mn tons) LHS Strip ratio (X) RHS The investment appetite among coal miners is also still muted. United Tractors (UNTR IJ) targets for machineries sales volume growth of only 5% y-o-y to 3,800 units in 2018, with demand mainly coming from the replacement market. The numbers for 2018 above are still far below those of 2011 when coal price Page 5

6 Industry Focus Thermal coal sector trend reached about the same level. The average monthly machineries sales volume reached 155 units in 2017, which is a far cry from 375 units per month over We believe that this is a positive signal that the high coal prices have not attracted any meaningful interest to the sector and the existing miners have refrained from raising their output significantly which is different from the coal price cycle where rising coal prices only benefited the existing wellestablished coal miners. UNTR s machineries sales volume trend Mining machineries (units) LHS recurrence of excess supply situations, especially with flat coal demand growth expected until 2022 (according to International Energy Agency or IEA forecast). ASEAN will drive coal demand growth Global demand growth will be driven by the ASEAN market, while China and India could provide a strong cushion against coal reduction efforts pursued by developed countries, such as EU nations. The surge in electricity demand in ASEAN will be mainly met by coal-fired power plants, according to the IEA. We reiterate our annual demand growth forecast of 1% y-o-y in , largely in line with the IEA s coal demand forecast. IEA estimates that around 100m tons of additional coal demand will come from ASEAN countries by 2020, which is sufficient to offset the stagnant demand from the rest of the world, mainly from the developed countries, mainly due to their battle with air pollution Jan 12 Apr 12 Jul 12 Oct 2012 Jan 13 Apr 13 Jul 13 Oct 2013 Jan 14 Source: Company, DBSVI Apr 14 Jul 14 Oct 2014 Jan 15 Apr 15 Jul 15 Oct 2015 Jan 16 Apr 16 Jul 16 Oct 2016 Jan 17 Apr 17 Jul 17 Oct 17 ASEAN s coal consumption outlook China output consolidation expecting flat output ahead Output consolidation is happening in China and it is positive for coal supply and demand. As China accounted for 46% of global thermal coal output of 3.6bn tons in 2016, the domestic coal miners consolidation plan will have a positive effect on global coal prices, by making it easier for the government to control coal output moving ahead. The output consolidation is also part of the plan to mitigate the potential decline in the number of coal-fired power plants, so as to prevent an excessive decline in coal prices that may hurt coal miners. The main thrust of the consolidation plan is to merge coal mines into several super large coal mines with an annual production capacity of 100m tons. The effort will eliminate any excess capacity and improve the operational efficiency among coal miners via mergers and acquisitions. The Chinese government is aiming for 3.9bn tons of coal mine production capacity vs total coal output of 3.4bn tons. So far, the China coal sector reform has reduced the total number of coal mines to 7,000 from 10,800 in China s Shanxi province has already set an output and total capacity targets of 1bn and 1.2bn tons by 2020, respectively, which resembles its 2016 output of 1bn tons. Shanxi province accounts for more than half of China s total production capacity and we believe the production capacity cap will prevent the F 2020F ASEAN countries coal consumption Source: BP statistics 2016, EIA, DBSVI However, we believe that replacing coal-fired power plants entirely will lead to massive structural financial and infrastructure issues in view of the fact that the manufacturing sector thrives on affordable energy generated by coal-fired power plants vis-à-vis other sources of energy. We understand that the initial investment of a gas-fired power plant can be 30% cheaper vs. a coal-fired power plant. However, shifting to cleaner natural gas energy is not so straightforward, given that coal-fired power plants fitted with boiling facilities need to undergo the conversion from burning coal to being steam-driven to generate energy. Moreover, gas-fired power plants require piping infrastructure facilities to transport gas to power plants, especially to areas with gas shortages such as some parts in Thailand. Hence, the low availability of gas in certain locations can render gas a less Page 6

7 Industry Focus Thermal coal sector attractive energy source compared to coal which is widely available in some nations, such as in Indonesia and India. Key risks Still no developments for domestic coal pricing regulation We have not baked in any meaningful progress for Indonesia s cost-plus margin domestic coal pricing mechanism in our valuation of coal stocks. However, if it does materialise, the cost-plus margin mechanism may impact coal miners coal pricing and earnings performance, especially miners that are highly exposed to the domestic coal market such as PTBA. We think that new pricing regulations may not materialise in view of the accompanying challenges, such as the flexibility for miners to divert their sales volume to export markets which requires them to sidestep their domestic market obligation (DMO) requirement. Moreover, we think coal pricing regulations will face challenges in getting the approval from coal sellers, who believe that a fixed volume is an integral part of negotiations. Impact of China s actions on current coal price trend As China accounts for a significant portion of 46% of global coal supply and demand, the Chinese government s policies and reform blueprints may have a bearing on coal prices. If China changes its domestic coal output blueprint, the proportion of coal usage in its energy mix and its coal import policies, the global coal supply-demand dynamics and earnings prospects of coal miners could be significantly affected. Higher-than-expected crude oil prices Higher fuel prices may weigh on coal miners margins in 2019, especially if crude oil prices go above US$70/bbl, which is a tad higher than our FY18 forecast of US$65/bbl. Fuel costs account for around 25%-30% of coal miners operational cash cost. Page 7

8 Industry Focus Thermal coal sector Company Guides Page 8

9 Indonesia Company Guide Adaro Energy Version 10 Bloomberg: ADRO IJ Reuters: ADRO.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 19 Jan 2018 BUY Last Traded Price ( 18 Jan 2018): Rp2,170 (JCI : 6,472.70) Price Target 12-mth: Rp2,800 (29% upside) (Prev Rp2,500) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com What s New TP lifted to Rp2,800, maintain BUY rating Raised FY18/19F earnings by 14%/15% on new coal price assumption Strong performance to persist in 2018 Valuation is attractive at 8.9x FY18F PE Price Relative Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 2,524 3,101 3,517 3,761 EBITDA 813 1,231 1,419 1,463 Pre-tax Profit ,125 1,165 Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) 1,322 1,425 1,548 1,675 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH ROAE (%) Earnings Rev (%): Consensus EPS (Rp): Other Broker Recs: B: 27 S: 1 H: 1 Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P. Higher coal price supports margin Maintain BUY with higher TP of Rp2,800. We raise our target price to Rp2,800 based on our new earnings forecast. We have assumed higher coal prices, leading us to raise FY18/19F earnings by 14%/15% to US$589m/US$610m. We believe the higher coal price trend will support an improvement in Adaro Energy (ADRO) s profitability. Moreover, higher coal production from Adaro Metallurgical Coal (AMC) coking coal division is also positive for its consolidated profitability, albeit our forecast has imputed only 1.6m tons of coking coal volume. Where we differ: Strong performance to sustain this year. We are confident that ADRO s profitability will improve. Beyond stabilising coal prices, we believe that it has in place solid costsaving strategies such as business-line integration and a conservative mining approach that has allowed it to ride through various cycles of the coal industry. We also believe ADRO s strong earnings prospects has not been priced in at the current valuation. Earnings momentum and steady coal price trends are share price catalysts in Besides the earnings recovery momentum that we believe will persist in FY18, steady coal prices will also support ADRO s share price. Seasonal winter restocking from September-December may provide the upside potential for coal prices relative to our Newcastle coal price benchmark forecast of US$65-70 per ton. As such, we believe ADRO s earnings performance is likely to top consensus expectations this year. Valuation: We keep our BUY call with a DCF-based TP of Rp2,800 (assuming WACC of 12.1% and terminal growth rate of 0%). This implies FY18F PE of 11.4x, which is in line with its 5-year average. Key Risks to Our View: 2017 coal pricing and mining management. Our forecast is dependent on ADRO s ability to secure favourable coal prices from buyers, and its efficiency-focused strategy. At A Glance Issued Capital (m shrs) 31,986 Mkt. Cap (Rpm/US$m) 69,409,538 / 5,198 Major Shareholders (%) Adaro Strategic Investment 43.9 Thohir Garibaldi 6.5 Soeryadjaya Edwin 4.3 Free Float (%) m Avg. Daily Val (US$m) 6.2 ICB Industry : Basic Materials / Mining ed: JS / sa:ma, PY, CS

10 Adaro Energy Sales volume (m tons) CRITICAL DATA POINTS TO WATCH Critical Factors Still relatively flat production outlook. We assume coal output growth to be relatively flat over FY16-18F, premised on ADRO s defensive strategy of prioritising profitability over expanding production. The Tutupan and Paringin concessions will remain the largest contributors (48m tons), accounting for 96% of ADRO's coal production. Improved coal price outlook. Coal ASP will improve alongside the better Newcastle coal benchmark price outlook. We expect ADRO s ASP to climb to US$60 per ton each in FY18 and FY19, in line with our higher coal benchmark price forecast of US$65 per ton next year. A higher ASP for coal will allow ADRO to expand its profitability and deliver better earnings growth. Lower cash cost on better operational efficiency. We have assumed a slightly higher cash cost of U$34 per ton for FY18, while conservatively imputing similar mining contracting rates for this year. We have factored in higher fuel cost in our cash cost estimate, however, ADRO s cost-saving measures should help to improve its profitability. ASP (US$/ton) Cash cost/ ton (US$/ton) Potentially a swing to net cash position in ADRO will continue to reduce borrowing cost via refinancing. We estimate interest expenses to stay around US$39m in 2018 and the balance sheet will turn into net cash this year due to strong operating cash inflow and stable capital expenditure outlook. EBITDA margin (%) Interest expenses (US$mn) Source: Company, DBSVI Page 10

11 Adaro Energy Appendix 1: A look at Company's listed history what drives its share price? Adaro s share price vs. operating margin performance Remarks Jan 09 Market understand seasonal strong profitability in 1Q of the year Share price downtrend on profitability contraction era due to bearish coal price cycle Nov 09 Sep 10 *share price in US dollar currency Jul 11 May 12 PX_LAST Mar 13 OPER_MARGIN Sustaining strong profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q16 Jan 14 Nov 14 Sep 15 Jul 16 May (10) ADRO s share price has tracked its profitability since Profitability contraction, despite the seasonal high in 1Q and low in 4Q over the past five years due to lacklustre coal prices, has weighed on ADRO s share price. ADRO subsequently initiated an intensive efficiencyenhancement programme in 1H16, resulting in a strong performance in 2H16, amid high coal prices. Remarks Adaro s share price performance vs. JCI since January Adaro underperformed the index during the prolonged coal price downtrend since ADRO JCI The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist The chart here shows that the market has not priced in a scenario of a coal price recovery, as the share price has underperformed the index since January ADRO s share price tends to outperform when coal prices are bullish, as seen in 1Q09-1Q12. Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15 Jul 16 May 17 Adaro s share price performance vs. coal price trend since January 2009 Remarks Share price Coal price Historically, ADRO s share ADRO Coal price price has tracked the Newcastle coal price benchmark and we believe the trend will persist, given 1.6 that coal price is a significant driver of ADRO s profit Beyond ADRO s earnings recovery, a steady coal price outlook in 2H17 on seasonal 0.6 winter restocking will support ADRO s share performance in 0.2 2H Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Page 11

12 Adaro Energy Leverage & Asset Turnover (x) Balance Sheet: Deleveraging in progress. ADRO will continue to deleverage its balance sheet in the absence of plans to acquire new coal assets. However, its foray into power plants means that ADRO cannot fully be a debt-free coal miner because it would need to rely on third-party financing to supplement weak internal cashflow generation. Modest capex outlook, ample reserves. We forecast ADRO will spend US$200m per year on capex in , mainly to expand output at existing concessions, for its downstream power plant project, and maintenance of machinery. Our capex assumption is in line with management s last year guidance for. ADRO has 1.1bn tons of coal reserves, sufficient to last 20 years at the current extraction rate. As such, ADRO can focus on the capex needs of its coking coal project. Share Price Drivers: Better profitability leads to a higher share price. ADRO s share price has tracked its profitability outlook. A better profitability outlook leads to higher share price and vice versa. ADRO successfully boosted its profitability in 2016, which moved close to the levels prior to the coal price downtrend in Capital Expenditure ROE (%) Key Risks: Coal price. The price of coal is the key upside/downside risk factor for coal miners, as they are price takers with minimal pricing power. Despite the fact that the impact of higher or lower coal prices is not fully reflected in ADRO s quarterly earnings, coal price sentiment can affect ADRO s stock price. Execution risk. If ADRO fails to meet its targeted production volume and cash cost per ton, ADRO could miss our earnings estimate. Forward PE Band (x) Company Background ADRO is Indonesia's second-largest coal producer. It sells 75% of its production to the export market and the rest in the domestic market. It has subsidiaries that operate in the mining contracting, barging and ship-loading, and water-tolling businesses. PB Band (x) Source: Company, DBSVI Page 12

13 Adaro Energy Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Sales volume (m tons) ASP (US$/ton) Cash cost/ ton (US$/ton) EBITDA margin (%) Interest expenses (US$mn) Segmental Breakdown FY Dec 2015A 2016A 2017F 2018F 2019F Revenues (US$m) Coal Mining 2,492 2,347 2,921 3,322 3,551 Mining Contracting Total 2,685 2,524 3,101 3,517 3,761 (US$m) Income Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 2,685 2,524 3,101 3,517 3,761 Cost of Goods Sold (2,141) (1,839) (1,948) (2,159) (2,352) Gross Profit ,154 1,358 1,409 Other Opng (Exp)/Inc (211) (97.7) (171) (193) (207) Operating Profit ,165 1,202 Other Non Opg (Exp)/Inc Associates & JV Inc (3.0) (0.2) (0.2) (0.3) (0.3) Net Interest (Exp)/Inc (48.9) (40.9) (33.7) (38.9) (37.2) Exceptional Gain/(Loss) Pre-tax Profit ,125 1,165 Tax (129) (206) (446) (529) (547) Minority Interest 1.40 (6.1) (6.7) (7.3) (7.3) Preference Dividend Net Profit Net Profit before Except EBITDA ,231 1,419 1,463 Growth Revenue Gth (%) (19.3) (6.0) EBITDA Gth (%) (17.3) Opg Profit Gth (%) (32.7) Net Profit Gth (Pre-ex) (%) (14.2) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Source: Company, DBSVI Page 13

14 Adaro Energy Quarterly / Interim Income Statement (US$m) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue Cost of Goods Sold (440) (526) (509) (508) (563) Gross Profit Other Oper. (Exp)/Inc (17.1) (14.3) (28.6) (57.4) (44.4) Operating Profit Other Non Opg (Exp)/Inc (11.0) (8.2) (7.4) (8.1) (6.3) Net Interest (Exp)/Inc Pre-tax Profit Tax (46.9) (67.4) (71.6) (111) (111) Minority Interest (1.3) (3.8) (12.8) (13.7) (14.8) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (2.6) EBITDA Gth (%) Opg Profit Gth (%) (8.0) Net Profit Gth (Pre-ex) (%) (22.9) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 3,494 3,981 3,933 3,878 3,816 Invts in Associates & JVs Other LT Assets 1, Cash & ST Invts 680 1,098 1,212 1,611 1,846 Inventory Debtors Other Current Assets Total Assets 5,937 6,543 6,812 7,129 7,457 ST Debt Creditor Other Current Liab LT Debt 1,384 1,280 1,293 1,239 1,184 Other LT Liabilities Shareholder s Equity 2,844 3,167 3,416 3,710 4,015 Minority Interests Total Cap. & Liab. 5,937 6,543 6,812 7,129 7,457 Non-Cash Wkg. Capital Net Cash/(Debt) (826) (337) (137) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH Net Debt/Equity ex MI (X) CASH CASH Capex to Debt (%) (3.1) Z-Score (X) Source: Company, DBSVI Page 14

15 Adaro Energy Cash Flow Statement (US$m) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit ,125 1,165 Dep. & Amort Tax Paid (129) (206) (446) (529) (547) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. (88.0) (94.2) (36.9) 68.9 (113) Other Operating CF (3.1) Net Operating CF Capital Exp.(net) 47.1 (712) (200) (200) (200) Other Invts.(net) (2.3) (2.5) (2.6) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF (104) (11.4) (11.7) Net Investing CF 124 (309) (306) (214) (214) Div Paid (75.5) (73.2) (248) (295) (305) Chg in Gross Debt (374) (72.2) (84.6) (54.6) (54.6) Capital Issues Other Financing CF (21.0) Net Financing CF (471) 46.2 (319) (334) (344) Currency Adjustments Chg in Cash (65.2) Opg CFPS (Rp) Free CFPS (Rp) 137 (13.3) Source: Company, DBSVI Target Price & Ratings History Source: DBSVI Analyst: William SIMADIPUTRA Page 15

16 Indonesia Company Guide Tambang Batubara Bukit Asam Version 8 Bloomberg: PTBA IJ Reuters: PTBA.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 19 Jan 2018 BUY Last Traded Price ( 18 Jan 2018): Rp3,040 (JCI : 6,472.70) Price Target 12-mth: Rp3,700 (22% upside) (Prev Rp3,380) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com What s New Raising TP to Rp3,700 maintain BUY rating Higher domestic coal price supports PTBA s ASP Raise earnings forecast in FY18/19 by 12%/18% We are bullish on PTBA s efficiency programme Price Relative Benefiting from steady domestic coal prices Maintain BUY with TP of Rp3,700. Our target price rises as we bump up our FY18/19 earnings by 12%/18% to Rp4.0tr/Rp5.2tr mainly for new coal price assumption, higher operational efficiency and stable mining contracting fees. We maintain our overall production volume target for 2018 as PTBA s production volume expansion is subject to railway capacity completion. Where we differ: We are bullish on PTBA s efficiency programme. Our earnings forecast is above consensus, as we think that PTBA s low mining contracting expenses will boost its profitability, thanks to its stricter stance in negotiating with third-party mining contractors and plans to expand its in-house mining contractor operations. PTBA aims to achieve a 50:50 ratio for its in-house and third-party mining contractors by around Moreover, we also believe PTBA that could deliver its expected volume growth of 9% FY16-19F CAGR on the back of railway capacity expansion. Forecasts and Valuation FY Dec (Rp m) 2016A 2017F 2018F 2019F Revenue 14,059 16,875 20,678 22,593 EBITDA 2,948 4,298 5,270 6,765 Pre-tax Profit 2,734 4,315 5,367 6,955 Net Profit 2,006 3,235 4,023 5,214 Net Pft (Pre Ex.) 2,006 3,235 4,023 5,214 Net Pft Gth (Pre-ex) (%) (1.5) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) (80) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) 905 1,059 1,251 1,500 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): Consensus EPS (Rp): Other Broker Recs: B: 22 S: 1 H: 3 Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P. Strong momentum for coal prices supports PTBA s ASP. We believe PTBA will continue to post strong y-o-y earnings growth momentum in FY18 on sustained coal sales volume growth and higher ASP. Resilient coal pricing will continue to buoy the coal ASP for both its domestic and export markets. Valuation: We lift our target price to Rp3,700. Our DCF-based target price (WACC: 11.6%, LT growth: 0%) implies 10.6x FY18F PE. Maintain BUY rating. Key Risks to Our View: Operational execution risk. If PTBA fails to maintain its low cash cost trend, such as failing to clinch a favourable mining contracting rate from third-party contractors, its earnings could miss our expectations. At A Glance Issued Capital (m shrs) 11,521 Mkt. Cap (Rpbn/US$m) 35,023 / 2,624 Major Shareholders (%) Republic of Indonesia (%) 65 Free Float (%) 35 3m Avg. Daily Val (US$m) 4.3 ICB Industry : Basic Materials / Mining ed: CK / sa:ma, PY, CS

17 Tambang Batubara Bukit Asam CRITICAL DATA POINTS TO WATCH Critical Factors NPAT growth will turn positive on better ASP outlook. PTBA s earnings will grow at a CAGR of 42% over FY16-FY18F, on the back of higher coal ASP in both the domestic and export markets. PTBA will maintain its strict efficiency policies and production volume expansion of 12% y-o-y in FY17 and FY18. A higher ASP will allow PTBA to normalise its profitability in FY17 after hitting an all-time low in FY16. Better coal prices for the export market, in line with better outlook for benchmark prices. PTBA s blended ASP will rise to Rp762k per ton in FY17 on higher benchmark prices. Amid the better outlook for benchmark prices, PTBA s export prices can outpace domestic prices, which tend to be fixed in the prior year. Production CAGR of 12% over FY16-18F on railway capacity expansion. We assume that PTBA s coal production and sales volume will grow by 12% CAGR (FY16-18F) to 24.8m tons in FY18 on railway capacity expansion. Our projected production and sales volume is lower than management s guidance, as our assumption for railway capacity expansion is less bullish, at an 11% CAGR (FY16-18F) to 30m tons. PTBA s sales volume growth is backed by long-term committed volumes of 574m tons with major buyers, mainly PLN (45% of long-term sales). Stable cash cost outlook given PTBA s strict cost control and large operational scale. PTBA s total cash cost (including royalty fees) is estimated to decrease 8% y-o-y, thanks to lower mining contracting fees and other stable operating cash cost, given that the strip ratio will remain stable at 4.5x. Sales Volume-mn tons Avg selling price(ro000/ton) Cash cost/ton (Rp000/ton) Capex (Rpbn) Railway capacity (mn ton) Source: Company, DBSVI Page 17

18 Tambang Batubara Bukit Asam Appendix 1: A look at Company's listed history what drives its share price? PTBA s share price vs. operating margin performance Share price downtrend on profitability contraction era due to bearish coal price cycle PX_LAST OPER_MARGIN Sustaining strong profitability performance despite low coal price cycle on efficiencies strategy boosted share price since 1Q Remarks PTBA s share price downtrend has been tracking its profitability and earnings because of falling coal prices (due to prolonged oversupply over the last five years). Despite the profitability improvement since 2016, its share price performance still lags behind that of its peers and the JCI (see next chart). 0 0 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 *share price in US dollar currency PTBA s share price performance vs. JCI since January 2009 Remarks PTBA underperformed the index during the prolonged coal price downtrend since The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist PTBA JCI The chart here shows that the market has not really priced in the recovery in coal prices, as the share price has been underperforming relative to the JCI since January PTBA s share price tends to outperform when coal prices are bullish, as seen in 1Q09-1Q12). Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 PTBA s share price performance vs. coal price trend since January 2009 Share price Coal price PTBA Coal price Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Source: Bloomberg Finance L.P., Company, DBSVI Remarks Historically, PTBA s share price has tracked the Newcastle coal price benchmark and we believe the trend will persist, given that coal price is a significant driver of PTBA s share price performance. Beyond PTBA s earnings recovery, a steady coal price outlook in 2H17 on seasonal winter restocking will support PTBA s share price in 2H17. Page 18

19 Tambang Batubara Bukit Asam Leverage & Asset Turnover (x) Balance Sheet: Low gearing balance sheet. PTBA has low gearing on the back of the low capex spending in the future. This will give it financial flexibility such as the ability to accelerate power plant projects or pay special dividends if and when coal prices are low. Most of PTBA s additional loans are allocated to its subsidiaries such as for the equipment and fleet expansion of its mining contracting subsidiary. Rpbn Capital Expenditure Share Price Drivers: Shares move in tandem with coal prices. PTBA's share price is correlated with its profitability outlook, which is determined by two critical factors coal ASP and its cash cost outlook. A period of higher coal prices is usually followed by higher share prices for coal miners, on the back of better earnings growth and an improved profitability outlook. Key Risks: Slower-than-expected production expansion. Slower-thanexpected railway capacity expansion can lead to disappointing production and sales volume. PTBA relies a lot on the execution and scale of PT KAI s plan to expand railway capacity. Slower expansion will translate into lower sales volume and revenue growth trend vs. our forecast. Higher-than-expected cash cost. PTBA s margin will face contraction if it fails to maintain its low cash cost trend, such as failing to renegotiate favourable railway transportation and mining contracting fees with third-party mining contractors, or if PTBA s new equipment fleet fails to achieve meaningful operating efficiencies. A higher-than-expected cash cost means that PTBA s margin and earnings growth could be lower than our forecast. ROE (%) Forward PE Band (x) Company Background PTBA is one of Indonesia's largest coal miners, with 1.99bn tons of coal reserves. Its main coal-mining concession is located in Tanjung Enim, South Sumatra. It is a state-owned company, with the government as its major shareholder. PB Band (x) Source: Company, DBSVI Page 19

20 Tambang Batubara Bukit Asam Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Sales Volume-mn tons Avg selling Cash cost/ton (Rp000/ton) Capex (Rpbn) 1, ,484 1, Railway capacity (mn ton) Income Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 13,734 14,059 16,875 20,678 22,593 Cost of Goods Sold (9,594) (9,657) (11,377) (13,907) (14,195) Gross Profit 4,140 4,402 5,498 6,771 8,398 Other Opng (Exp)/Inc (1,725) (1,871) (1,519) (1,861) (2,033) Operating Profit 2,414 2,531 3,980 4,910 6,365 Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) Pre-tax Profit 2,664 2,734 4,315 5,367 6,955 Tax (627) (709) (1,079) (1,342) (1,739) Minority Interest (1.2) (18.2) (1.5) (1.8) (2.0) Preference Dividend Net Profit 2,036 2,006 3,235 4,023 5,214 Net Profit before Except. 2,036 2,006 3,235 4,023 5,214 EBITDA 2,699 2,948 4,298 5,270 6,765 Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (Pre-ex) (%) 1.0 (1.5) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) NM NM NM NM NM Source: Company, DBSVI Page 20

21 Tambang Batubara Bukit Asam Quarterly / Interim Income Statement (Rpbn) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017 Revenue 3,283 4,017 4,547 4,420 4,255 Cost of Goods Sold (2,488) (2,061) (2,855) (2,767) (2,553) Gross Profit 795 1,956 1,692 1,653 1,702 Other Oper. (Exp)/Inc (145) (203) (257) (260) (289) Operating Profit 417 1,197 1,223 1,255 1,229 Net Interest (Exp)/Inc (33.5) (36.7) (56.1) (53.3) (31.5) Exceptional Gain/(Loss) Pre-tax Profit 452 1,289 1,218 1,256 1,252 Tax (111) (283) (335) (393) (334) Minority Interest (0.8) (14.7) (13.0) (9.8) (15.8) Net Profit Net profit bef Except EBITDA Growth Revenue Gth (%) (2.8) (3.7) EBITDA Gth (%) nm nm nm nm nm Opg Profit Gth (%) (8.7) (2.0) Net Profit Gth (Pre-ex) (%) (10.3) (12.2) (2.0) 5.7 Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 5,579 6,088 6,097 6,085 6,146 Invts in Associates & JVs Other LT Assets 3,717 4,139 5,189 6,066 6,670 Cash & ST Invts 3,115 3,675 5,551 6,899 9,237 Inventory 1,233 1,102 1,298 1,587 1,620 Debtors 1,596 2,285 1,857 2,276 2,487 Other Current Assets 1,654 1,288 1,288 1,288 1,288 Total Assets 16,894 18,577 21,280 24,200 27,448 ST Debt Creditor 1, Other Current Liab 3,777 4,013 4,013 4,013 4,013 LT Debt 623 2,141 3,409 3,964 4,326 Other LT Liabilities 2, Shareholder s Equity 9,175 10,421 12,200 14,413 17,281 Minority Interests Total Cap. & Liab. 16,894 18,577 21,280 24,200 27,448 Non-Cash Wkg. Capital (440) 122 (255) Net Cash/(Debt) 2,492 1,044 2,141 2,935 4,911 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) Z-Score (X) Source: Company, DBSVI Page 21

22 Tambang Batubara Bukit Asam Cash Flow Statement (Rpbn) FY Dec 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 2,664 2,734 4,315 5,367 6,955 Dep. & Amort Tax Paid (627) (709) (1,079) (1,342) (1,739) Assoc. & JV Inc/(loss) Chg in Wkg.Cap. 245 (1,165) 378 (555) (226) Other Operating CF (86.0) (88.7) Net Operating CF 2,717 1,462 4,037 3,724 5,263 Capital Exp.(net) (1,742) (776) (328) (328) (423) Other Invts.(net) (134) (155) (1,156) (792) (518) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF 90.0 (1,147) Net Investing CF (1,786) (2,078) (1,484) (1,120) (941) Div Paid (1,050) (832) (1,456) (1,811) (2,346) Chg in Gross Debt (806) 2, Capital Issues Other Financing CF Net Financing CF (1,855) 1,175 (677) (1,256) (1,984) Currency Adjustments Chg in Cash (924) 559 1,876 1,349 2,338 Opg CFPS (Rp) 1, Free CFPS (Rp) Source: Company, DBSVI Target Price & Ratings History Source: DBSVI Analyst: William SIMADIPUTRA Page 22

23 Indonesia Company Guide Indo Tambangraya Megah Version 9 Bloomberg: ITMG IJ Reuters: ITMG.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 19 Jan 2018 BUY Last Traded Price ( 18 Jan 2018): Rp25,825 (JCI : 6,472.70) Price Target 12-mth: Rp29,500 (14% upside) (Prev Rp25,000) Analyst William SIMADIPUTRA william.simadiputra@id.dbsvickers.com What s New Raised TP to Rp29,500 on higher coal price assumption FY18/19F earnings lifted by 7%/9% on new coal ASP Dividend announcement is a short-term catalyst Valuation undemanding at 8.1x FY18 PE Price Relative Dividend to fuel another rally Raised TP to Rp29,500 on higher coal price outlook, maintain our BUY rating. Our higher target price for Indo Tambangraya Megah (ITMG) is derived from our new earnings forecast on higher coal price outlook. We have raised FY18/19F earnings by 7%/9% y-o-y to US$266m/US$286m, from a higher coal ASP trend on new coal benchmark price forecast, offset slightly by higher fuel price assumption of US$0.8 per liter. Our target price implies longer reserves life index of 12 years. Where we differ: we are forecasting positive earnings growth in 2018 vs. flat estimate by consensus. We believe that ITMG s earnings have not peaked yet given the steady coal price performance and there is room for output expansion. We reiterate our positive stance on its long-term profitability outlook given its ability to maintain a relatively healthy cash margin despite a higher strip ratio. Moreover, higher coal price also provides upside risk to ITMG s reserves life, earnings growth, and hence share price valuation. Forecasts and Valuation FY Dec (US$ m) 2016A 2017F 2018F 2019F Revenue 1,368 1,703 1,923 2,033 EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) Net Pft Gth (Pre-ex) (%) EPS (Rp) 1,544 2,759 3,140 3,373 EPS Pre Ex. (Rp) 1,544 2,759 3,140 3,373 EPS Gth Pre Ex (%) Diluted EPS (Rp) 1,544 2,759 3,140 3,373 Net DPS (Rp) 490 1,931 2,198 2,361 BV Per Share (Rp) 10,707 11,535 12,477 13,489 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): Consensus EPS (Rp): 2,830 2,736 2,683 Other Broker Recs: B: 20 S: 0 H: 6 Positive catalyst: consistent earnings growth and attractive dividend yield. ITMG s dividend yield remains the highest among its peers. We think ITMG will distribute 70% of its FY18 profit, translating to a dividend yield of 9.6% in Valuation: We keep our BUY call with a DCF-based TP of Rp29,500 (assuming WACC of 12.1% and terminal growth rate of 0%). This implies an FY18F PE of 9.4x, which is still below with its 5- year average PE multiple of 10.7x. Key Risks to Our View: 2018 coal pricing and mining management. Our forecast is dependent on ITMG s capability to secure favourable coal prices from buyers, and its efficiency strategy. At A Glance Issued Capital (m shrs) 1,130 Mkt. Cap (Rpm/US$m) 29,180,313 / 2,185 Major Shareholders (%) Banpu Minerals 65.1 Free Float (%) m Avg. Daily Val (US$m) 1.9 ICB Industry : Basic Materials / Mining Source of all data on this page: Company, DBSVI, Bloomberg Finance L.P. ed: JS / sa:ma, PY, CS

24 Indo Tambangraya Megah CRITICAL DATA POINTS TO WATCH Sales volume (m tons) Critical Factors Positive earnings growth to continue in We forecast earnings will grow by 14% y-o-y to US$266m in FY18 before growing further by 7% to US$286m in FY19. The higher revenue and earnings in FY18 would be mainly driven by the better coal ASP outlook, coupled with a higher cash margin per ton, despite ITMG's flat production and sales volume growth. Single digit coal output growth. In line with guidance and the group s focus on profitability rather than production, we assume flat coal production and sales volume of 28m tons in FY18, rising by 3.5% y-o-y to 29m tons in FY19. As ITMG s mines have a remaining life of eight years, ITMG prefers to maintain flat production volume to ensure stable profitability. We assume ITMG's strip ratio will increase to 10.6x in 2018 vs. 10.0x in 2017 given the brighter coal ASP outlook hence, ITMG should be able to mine coal in the more pricey concessions (in terms of operational cost). ASP recovery underway. We forecast the benchmark coal price will remain at US$75 per ton beyond This will affect ITMG s coal pricing ahead. We assume ASP of US$70 per ton in 2018 and Our ASP assumption implies a 3% premium to our forecast benchmark price. Higher cash cost on higher strip ratio. Cash cost will increase to US$36.8 per ton in FY17 due to a better strip ratio outlook and higher fuel cost. We also assume fuel cost will increase to US$0.8 per litre (+14% y-o-y) in FY18, on the back of a improved crude oil price outlook. However, we see limited room for mining contracting fees to be renegotiated lower given ITMG s flat volume growth. Avg selling price (US$/ton) Cash cost (US$/ton) Fuel cost (US$/liter) Cost management will be the profitability driver in Miners, including ITMG, cost efficiency strategy 2018 will be the key earnings driver given its machineries intensive mining activities. Higher coal price would provide ITMG with better operational flexibility to cope with the higher fuel cost outlook, hence maintaining its strong profitability. EBITDA margin (%) Source: Company, DBSVI Page 24

25 Indo Tambangraya Megah Appendix 1: A look at Company's listed history what drives its share price? ITMG s share price vs. operating margin performance Share px performance (X) Share price downtrend on profitability contraction era due to bearish coal price cycle PX_LAST OPER_MARGIN Sustaining strong profitability performance despite low coal price as it benefits from its efficiencies strategy has given a boost to its share price since 1Q16 OPM (%) Remarks ITMG s share price weakness has tracked its profitability and earnings downtrend in tandem with the coal price downcycle that arose from prolonged oversupply conditions in the last five years. Despite its profitability improvement since 2016, its share price has still lagged behind and underperformed the JCI index (see next chart) Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15 Jul 16 May 17 *share price in US dollar currency Remarks ITMG s share price performance vs. JCI since January 2009 ITMG JCI ITMG underperformed the index during the prolonged coal price downtrend since The share price rebounded in 2016 due to earnings performance on efficiencies effort despite weak coal price trend still persist The chart here shows the market has not priced in the scenario of a coal price recovery, as ADRO s share price has continued to underperform relative to the JCI index since January ADRO s share price tends to outperform during coal price upcycles, as seen in 1Q09-1Q12. Jan 09 Nov 09 Sep 10 Jul 11 May 12 Mar 13 Jan 14 Nov 14 Sep 15 Jul 16 May 17 ITMG s share price performance vs. coal price trend since January 2009 Share price Coal price ITMG RHS Coal price Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Source: Bloomberg Finance L.P., company, DBSVI Remarks Historically, ITMG s share price has tracked the Newcastle coal price benchmark trend. We believe the trend will persist given coal price is a significant driver for ITMG s share price performance. Apart from this, ITMG s earnings recovery and the steady coal price outlook in 2018 on tight supply and demand outlook will help support ADRO s share price performance in Page 25

26 Indo Tambangraya Megah Balance Sheet: Net cash position. ITMG s has a net cash balance sheet as a strategy to cope with the challenging coal price environment. Its net cash position also means that ITMG will be able to pursue acquisition of reserves when opportunities present. Share Price Drivers: Stock valuation had de-rated on bleak industry outlook in the past three years. ITMG s share price has de-rated because of concerns over its depleting reserves, barring any potential sizeable acquisitions ahead. Its limited reserves could also hurt earnings if it needs to cut output further, thus restricting its ability to lower its strip ratio. Leverage & Asset Turnover (x) Capital Expenditure Key Risks: Drop in coal prices. Coal miners are price-takers, with little pricing power. Furthermore, the pricing outlook is more challenging now, given the abundant supply and slower coal demand growth due to environmental concerns. Operational risk. If ITMG fails to secure meaningful coal reserves in the future, it may have to halt operations. Moreover, the efficiency-focused strategy may not lead to meaningful reductions in cash cost. ROE (%) Profitability risk. We have assumed that ITMG would maintain its cash margin by lowering its production. It is possible that ITMG may need to further cut its coal production volume if the remaining profitable concessions do not meet its expectations. Company Background ITMG is one of the largest coal mining companies owned by Banpu. The scope of the business includes coal mining operation, processing and logistics. ITMG owns majority stares in seven subsidiaries and operates six mining concessions in Kalimantan Island. Forward PE Band (x) PB Band (x) Source: Company, DBSVI Page 26