Waiting for the next catalyst

We decided to revise our average coal price assumption for 2023F to USD 172 per ton (prev: USD 220) since we expect a volatile year for coal, mainly due to China's abundant coal inventory (4M23: 52 million tons, an all-time high), despite the upside risk from China’s economic stimulus and the upcoming winter, which should help boost coal demand. This, coupled with a higher effective royalty rate assumption, prompted us to lower our net profit forecast for coal miners under our coverage by 30% - 56%. We reiterate our NEUTRAL rating for the coal industry, with ADRO as our top pick.

Prices might remain volatile for a while. Coal prices experienced a steady decline throughout the first six months of 2023, coming down from their peak of USD 372/ton to the current level of USD 207 per ton (-46.9% YTD). The decline was mainly caused by China's slower-than-anticipated economic recovery, which put pressure on energy demand. However, we see a potential catalyst in the form of economic stimulus; after deciding to cut medium-term lending rates to 2.65% (prev: 2.75%) and its seven-day repo rate to 1.9% (prev: 2%) to boost financial liquidity, the Chinese government is considering providing a stimulus package to accelerate its post-pandemic recovery. In addition, we expect another substantial upside risk in 4Q23 in the form of the winter season, which is expected to lift demand for energy commodities, including coal. According to our research, China generates more electricity in the second half of the year (58-63% of its annual electricity output in the past five years). Nevertheless, we believe that coal prices will remain volatile, since China's abundant coal inventory (4M23: 52 million tons, an all-time high) might offset the increase in demand.

The dividend party is over. On the back of their strong performance in 2022, most coal companies in our coverage generated attractive dividend yields in 2023 (ranging from 16% to 30%). After the dividend season, investors are now waiting for more certainty regarding the BLU regulation. According to our channel analysis, the BLU regulation could be implemented in July 2023. When BLU regulation comes into effect, we believe that PTBA and BUMI will be the ones reaping the most benefit, as they have a larger domestic exposure, while ADRO and ITMG might suffer. Please note that we have not yet incorporated BLU into our model, as we are still awaiting further regulatory disclosure.

Fine-tuning our forecast. We decided to revise our average coal price assumption for 2023F to USD 172 per ton (prev: USD 220) and raise our effective royalty rate assumption for 2023F, prompting us to tone down our net profit forecast by 30%-56%. We reduced our net profit forecast for PTBA by 44.2% in 2023F and kept our HOLD rating for the company with a new, lower TP of IDR 3,500 per share. We toned down ITMG’s 2023F net profit forecast by 33.2% and kept our HOLD rating for the company with a lower TP of IDR 26,000/share. We slashed ADRO’s 2023F net profit forecast by 30.4%; despite this, we kept our BUY rating unchanged, albeit with a lower TP of IDR 2,900 per share. Lastly, we cut BUMI’s 2023F net profit forecast by 56.2%, though we kept our BUY rating for the company with a lower TP of IDR 150 per share.

NEUTRAL rating for the coal sector. We reiterate our NEUTRAL rating for the coal industry, with ADRO as our top pick (BUY, TP IDR 2,900/share), mainly due to the company’s business diversification and strong balance sheet. Downside risks: 1) lower-than-expected coal prices, and 2) regulatory changes.