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ITMG - Blessings from energy deficit

Devi Harjoto 23 August 2022

• ITMG’s 1H22 net profit jumped 291.8% YoY to USD460.8mn (+16.1% QoQ in 2Q22) 

• We expect net revenue growth of 39% YoY, EBITDA margin of 47.4% in 2022 

• We reiterate our “BUY” call with 13% upside potential on a 12-month view on strong ASP 

Fairly outperformed ITMG's net profit jumped 291.8% YoY to USD460.8 million in 1H22 (+16.1% QoQ), accounting for 53.1% of our FY estimate. This was attributable to surging net revenue by 110.2% YoY in 1H22 to USD1.42bn. The company's gross margin expanded from 33.6% in 1H21 to 52.7% in 1H22 as cost of revenue grew 49.8% YoY to USD672.4mn that is reflected by higher cash cost by 56.5% YoY to USD76.5/MT. Furthermore, EBITDA margin was improved from 31.3% in 1H21 to 49.3% in 1H22. Meanwhile, it booked losses in coal and fuel swaps totaling USD57.8mn in 1H22, growing 197.4% YoY. Balance sheet wise, ITMG managed to maintain net cash position in 1H22. Saved by high ASP amid soft volume ITMG's strong performance was boosted by its ASP skyrocketing 135.2% YoY (38.2% QoQ to USD205.6/MT) to USD175.4/MT in line with significant gas price increase resulted from war in Ukraine. Nevertheless, sales volume went down 10.0% YoY (-11.6% QoQ) to 8,1 million MT, in line with sluggish production volume that shrunk 15.9% YoY (-2.6% QoQ) due to challenging weather. The sales volume figure in 1H22 was still 39.5% of its lower-end target of 20.1 million MT. Therefore, we expect sales volume of 18.0 million MT in 2022, although production is likely to improve in 2H22 thanks to more favorable weather. The company's sales were largely from export sales that contributed 88%, with export to China was 28% in 1H22, followed by Japan with 16%. Expecting price to remain high We expect ITMG's revenue and net profit of USD2.89bn and USD897.9mn in 2022, respectively. We estimate ASP to be at USD170/MT, assuming that coal price increases in 2H22 is likely to slow down on the back of aggresive monetary tightening in developed economies and slow economic recovery in China pertinent to the country’s covid-19 policies. Nevertheless, we note that prolonged conflict in Ukraine, and higher demand during winter in 4Q22 will upside risks to coal price. Furthermore, EBITDA margin is expected to stand at 47.4% in 1H22 as cost of revenue remains controllable despite higher mining costs and royalty. Meanwhile, as part of its plans to expand into renewables, ITMG set up a new subsidiary CPI that has signed Solar Rooftop Power Purchase Agreement (PPA) with a total capacity of 7.27 MWp, in addition to establishment of PLTS at the Bontang Port, and Melak that is still under construction. Reiterate BUY on the back of high ASP amid strong demand and tight supply We maintain our BUY call with a DCF-based price target of Rp41,500/share. The stock is currently traded at a 2022F PER of 3.4x and EV/EBITDA of 1.1x. We highlight several paramount catalysts including 1) strong demand for high CV coal amid tight supply on the back of rising geopolitical tension in Europe; 2) expansions to coal gasification project and renewable energy; 3) solid balance sheet with net cash position and 4) strong USD. Nevertheless, we note several downside risks to our recommendation, namely 1) China's slow economic recovery and fear of recession that may lead to commodity price correction; 2) impending FFR hikes and 3) global transition to renewable energy.

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