Morgan Stanley Set Target Price Borneo IDR 1,850

Morgan Stanley Research believes that PT Borneo Lumbung Energi & Metal TBK (BORN) is a beneficiary of tight supply-demand in the Asia/Pacific coking coal industry, given the superior quality of its coal and proximity to end markets.

While the lack of a track record introduces uncertainty regarding execution and volume growth, Morgan Stanley believes its forecasts are sufficiently conservative.  "Even so, we expect BORN to deliver a 2010-12 EBITDA CAGR of 94%. We thus set our price target at Rp 1,850 based on a 2011EV/EBITDA of 8.5x," said a company report.

This is at a premium to the 2011 industry average EV/EBITDA of 8.0x, reflecting Borneo’s strong earnings momentum as well as the upturn of the coking coal cycle. "Assuming no disruption to production or logistic and BORN achieves its sales volume, fair value could reach Rp2,150, we estimate."  

 

Strong earnings momentum
Morgan Stanley's estimated 94% 2010-12 EBITDA CAGR to US$524 million by 2012 is driven by higher margins and growing production volume. While BORN’s production cost is higher than that of other coal companies in Morgan Stanley's coverage, its per tonne EBITDA margin is over US$80 per ton vs an average US$40 per ton for the brokerage's coverage companies. "Moreover, we expect a higher ASP, in line with rising coking prices until 2013." 

By end-2011, Borneo is expected to ramp up production capacity at its Kohong block to 5 million tons vs 3.6 million tons this year. Morgan Stanley remains bullish on the outlook for coking coal and expect the seaborne market to remain tightly balanced.

Already Morgan Stanley is seeing spot coking prices rising on the back of disruption to the supply from Australia. "Over 2010-15, we project demand to grow at a CAGR of 5.8% vs. 6.5% in seaborne coking coal supply."

China remains the key demand driver (2010-15E CAGR of 5%), but we also see India emerging as an important coking coal customer (2010-15E CAGR of 16%).