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Potential recovery in 2H18

1. Earnings below expectation on coal swap and forex losses.
2. Margin in 1H18 dropped due to higher stripping ratio and opex.
3. Mining life expanded to 11.5 years as coal reserves improved.
4. Maintain Buy rating with unchanged TP of Rp29,000.

Weak results on coal swap and forex losses.

ITMG

recorded weak results in 2Q18 with earnings dropped 23% qoq and 6.8% yoy to US$44.8mn, allowing net profit to reach US$103mn in 1H18, down 2.2% yoy and came below expectation, forming only 37% and 45% of consensus' and our forecasts for FY18F. Weak earnings in 1H18 were mostly caused by lower coal sales volumes of 12% yoy and losses from coal swaps and forex of US$15.6mn. Operating profit reached US$78.9mn in 2Q18, down 10% qoq but up 12% yoy, bringing operating profit to US$167mn in 1H18, up 4.3% yoy but came below consensus (42%) and our (46%) forecast for FY18F.
Margin decreased as stripping ratio and opex increased.

ITMG

recorded lower margin in 1H18 despite coal ASP increased by 18% yoy as blended stripping ratio increased to 11.4x (from 10.1x in 1H17). Higher opex in 1H18 (+12%) also contributed to lower operating margin of 20.6%, from 21.3% recorded in 1H17. Nonetheless, lower precipitation in 2H18 will benefit

ITMG

, in our view. We expect operational improvement and margin expansion in 2H18 as rainfall dropped significantly in Jul'19 (Fig. 2).
Coal reserves improved as price increased.

ITMG

recorded higher coal reserves of 255mn tons (Fig. 5) as the company booked an additional 77mn tons of coal reserves on the back of higher coal price and additional exploration activities. The company is committed to further improve coal reserves through additional exploration activities, optimize costs efficiency and raise stripping ratio as evident in 1H18. With our flat annual production volumes forecasts of ~22mn tons,

ITMG

's mine life improved to 11.5 years.
Maintain Buy rating as performance in 2H18 would improve. Despite weak results in 1H18, we maintain our forecast for FY18F as we expect operational improvement and better margin in 2H18 on the back of favorable weather as Indonesia is entering dry season, which expected to be the hottest season in more than three years. At this stage, we maintain our Buy recommendation on

ITMG

with 12% potential upside to our DCF-based ( WACC : 12.7%, TG: 1.5%) target price of Rp29,000. Our TP implies FY18F-19F P/E of 10.5x-11.7x, respectively.

Sumber : IPS RESEARCH