23 October 2023

Coal sector outlook

EQUITY: COAL

Research Analysts
Dividend play as a place to hide
Indonesia Research Team
Michael Wildon Ng
Michael.wildon@verdhana.id
+62 (81219597829)
What happened to coal prices in the past week?
The NEWC index at USD138/t, still hovering close to a three-month high, with the average
price at USD158/t in September, rose 8% compared to August. In Indonesia, the ICI-4
price closed at USD61/t, posting a four-month high on strong demand from China amid
sizeable arbitrage against Chinese domestic prices (Fig. 3 ). This was supported by: 1)
unusually intense summer heat with production cuts in several provinces caused by safety
inspections; and 2) significant growth in thermal coal imports in India, driven by the
acceleration of coal use following COVID-containment measures. Recently coal stock in
India reached ~7 days of use (vs 9 days of burn at the same time last year) (Fig. 8 ). The
country's efforts to upgrade its infrastructure may lead to continued growth in the
consumption and importation of coal.
Dutch TTF gas futures traded around EUR50/MWh, up by ~20% compared to last month
after a temporary production halt at Tamar , one of Israel’s largest fields. In addition, there
could be a supply disruption arising from a suspected gas leak at the Balticconnector gas
pipeline (link ).
9M23F result preview and preferred picks
The XW1/ICI3/ICI4 benchmarks declined by -9%/-15%/-19% in 3Q23 (Fig. 4 ). Taking into
account declining coal prices, we anticipate an improved margin in 3Q, driven by lowered
royalty expenses resulting from the new HBA pricing formula that came into effect in
August. To provide context, royalty cost makes up around 16-40% of coal companies'
COGS. We think that this will mainly benefit ADRO (Buy) and HRUM (Buy), which had
38%/29% royalty contribution of their 2Q COGS, respectively (Fig. 9 ). In our overall
forecast for 9M23F, we anticipate that ADRO and HRUM will outperform consensus
expectations, as they have the potential to surpass their 2023 production targets (Fig. 10 ).
Moreover, we like ADRO for its potential sales growth among other coal players.
Dividend plays for a place to hide – coal stocks among the top dividend yield
disbursement
Amidst challenging macroeconomic conditions, we believe coal stocks can offer a place to
hide. The recent surge in oil prices due to geopolitical turmoil provides added interest to
switch to coal-based electricity generation compared to diesel. We compile a list of
companies in Indonesia known for their high dividend yield, with coal stocks among the
top dividend yield, providing a generous dividend above the MSCI Indonesia trailing 12M
yield of ~4.6%. We screen companies with a minimum of 6% dividend yield with average
trading value of >USD0.2mn per day. Our picks for dividend plays are ADRO (Buy) for its
potential interim dividend disbursement in 4Q23 with ~9% yield, followed by ITMG (Buy)
with its potential final dividend of ~13% yield in 2024.
Verdhana | Coal sector outlook 23 October 2023

Fig. 1: Energy prices summary

Unit 2020 2021 2022 2023 Q1 2023 Q2 2023 Q3 2023 Q4 2023 10/13/23 10/20/23 W-W Q2-Q3 Q3-Q4 2023YTD
Energy
Coking Coal USD/ton 125 219 364 289 344 250 257 354 363 353 -2.9% 2.5% 38.1% 34.1%
Newcastle Coal USD/ton 60 136 357 185 257 161 146 143 144 138 -4.1% -9.3% -2.6% -65.9%
EU 6000 CIF ARA 1M Fwd USD/ton 51 115 271 130 146 127 116 130 140 138 -1.4% -8.2% 12.0% -27.2%
HBA ID Price USD/ton 59 114 267 233 287 251 187 133 133 133 0.0% -25.4% -28.8% -52.7%
ICI-1 Price USD/ton 61 120 244 157 215 174 122 121 123 123 0.1% -29.6% -1.4% -47.8%
ICI-2 Price USD/ton 52 108 172 108 137 117 88 91 96 97 1.7% -24.3% 3.2% -37.0%
ICI-3 Price USD/ton 43 95 128 87 104 95 73 77 82 83 2.2% -23.2% 5.3% -28.5%
ICI-4 Price USD/ton 30 62 88 64 80 72 53 55 60 61 2.7% -26.4% 4.1% -32.1%
Henry Hub Natural Gas USD/mmbtu 2.1 3.7 6.5 2.6 2.8 2.3 2.7 3.1 3.2 2.9 -10.4% 14.7% 17.9% -35.2%
Dutch TTF Natural Gas EUR/MWh 9.6 46.9 132.2 41.3 53.9 35.2 33.7 46.1 54.0 51.1 -5.3% -4.2% 36.5% -33.0%
WTI Oil USD/bbl 39.6 67.9 94.4 78.0 76.1 73.7 82.0 86.5 87.7 88.8 1.2% 11.2% 5.5% 10.6%
Brent Oil USD/bbl 43.3 70.8 99.1 82.5 82.2 77.9 85.8 89.1 90.9 92.2 1.4% 10.1% 3.8% 7.3%
Ammonia USD/ton 236 553 1,007 421 653 248 334 550 550 550 0.0% 34.7% 64.7% -36.4%
LPG USD/ton 379 648 714 557 652 496 518 583 587 585 -0.3% 4.3% 12.6% -4.3%

Source: Company data, Verdhana research

Fig. 2: ICI (Indonesia Coal Index) prices stabilizing Fig. 3: China vs Newcastle coal price disparity

Note: ICI – Indonesia Coal Index, price benchmark for Indonesia

coal traders
Source: Argus, McCloskey, Verdhana Source: Bloomberg Finance L.P., Verdhana research

Fig. 4: ICI price decline in 3Q

Note: ICI – Indonesia Coal Index, price benchmark for Indonesia

coal traders
Source: Argus, McCloskey, Verdhana research

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Verdhana | Coal sector outlook 23 October 2023

Fig. 5: Despite rising China production, coal imports still Fig. 6: China coal imports by country
going strong supported by demand and supply issue post
mining accident

Source: Bloomberg Finance L.P., Verdhana research

Source: Bloomberg Finance L.P., Verdhana research

Fig. 7: China thermal coal import seasonality Fig. 8: India coal stocks

Source: Bloomberg Finance L.P., Verdhana research

Source: Bloomberg Finance L.P., Verdhana research

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Verdhana | Coal sector outlook 23 October 2023

Fig. 9: Coal companies’ royalty comparison – Following the first amendment, the second HBA formula adjustment is
anticipated to become effective in the third quarter (link )

PTBA royalty changes 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23* 2Q23
Royalty cost (USD/ton) 3.1 4.9 5.2 4.9 5.4 8.9 12.1 9.7 8.5
Changes q-q 12% 58% 6% -6% 9% 65% 37% -20% -12%
Royalty cost to sales (%) 5.0% 6.2% 5.6% 6.0% 5.8% 9.3% 13.4% 13.0% 12.3%
Royalty cost to COGS (%) 8.3% 12.9% 12.0% 10.3% 11.2% 16.5% 20.7% 16.4% 15.9%

ADRO royalty changes 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23* 2Q23
Royalty cost (USD/ton) 7.5 8.6 11.2 12.2 23.7 22.2 20.4 30.9 21.7
Changes q-q 17% 14% 31% 8% 95% -6% -8% 52% -30%
Royalty cost to sales (%) 11.4% 11.2% 10.0% 12.1% 15.7% 15.6% 15.9% 26.4% 22.4%
Royalty cost to COGS (%) 17.6% 21.0% 22.9% 23.9% 40.6% 35.9% 38.7% 45.2% 38.3%

INDY royalty changes 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23* 2Q23
Royalty cost (USD/ton) 6.9 9.9 11.7 11.1 16.9 21.2 21.2 33.5 23.6
Changes q-q 11% 45% 18% -5% 52% 26% 0% 58% -30%
Royalty cost to sales (%) 9.6% 11.2% 9.6% 10.7% 13.7% 16.5% 15.0% 27.7% 23.1%
Royalty cost to COGS (%) 12.6% 16.3% 15.2% 15.6% 21.7% 25.3% 21.5% 35.6% 28.7%

HRUM royalty changes 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23* 2Q23
Royalty cost (USD/ton) 8.7 13.2 18.5 24.4 28.5 33.0 31.2 28.9 17.4
Changes q-q 13% 51% 41% 32% 17% 16% -5% -7% -40%
Royalty cost to sales (%) 10.4% 13.8% 14.7% 13.6% 14.5% 18.2% 18.5% 17.7% 15.9%
Royalty cost to COGS (%) -20.5% -28.6% -33.3% 37.6% 42.1% 44.8% 38.4% 39.6% 29.3%

ITMG royalty changes 2Q21 3Q21 4Q21 1Q22 2Q22 3Q22 4Q22 1Q23* 2Q23
Royalty cost (USD/ton) 9.4 12.9 17.7 17.8 28.0 32.1 28.4 24.9 15.0
Changes q-q 15% 37% 37% 1% 57% 15% -11% -12% -40%
Royalty cost to sales (%) 11.7% 11.5% 12.4% 12.0% 14.0% 15.3% 14.2% 16.4% 13%
Royalty cost to COGS (%) 18.4% 21.8% 25.5% 25.2% 29.6% 34.1% 27.2% 26.8% 19%

*First amendments to the HBA Formula starting from March 8, 2023.

PTBA reflects adjustments in the Royalty scheme as per PP 26/2022, which became effective on September 15, 2022.
ADRO and INDY represent the shift from CCoW to IUPK license extension, effective from January 2023.
Source: Company data, Verdhana research

Fig. 10: Coal 1H23 vs FY23T production – ADRO and HRUM has exceeded above 50% of
their FY targets in 1H23

Production (Mt) 1H23 FY23T % of target

ADRO 33.4 62.0 54%
ITMG 8.2 17.0 48%
PTBA 18.8 40.0 47%
HRUM 3.4 6.0 57%
INDY 14.3 31.0 46%
Source: Company data, Verdhana research

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Verdhana | Coal sector outlook 23 October 2023

Fig. 11: Coal companies’ dividend schedule – ADRO is the closest one, yielding ~9% of
the interim dividend, following by ITMG’s final dividend in 2024F.

Dividend schedule ADRO ITMG INDY PTBA

Interim (IDR/sh) 246 2,660 N/A N/A
Yield (%) 8.7% 9.5% N/A N/A
Cum date est. Dec-23 Sep-23 N/A N/A
Final (IDR/sh) 246 3,540 125 438
Yield (%) 8.7% 12.7% 6.3% 16.3%
Cum date est. May-24 Apr-24 May-24 Jun-24
FY payout 75% 80% 30% 90%
FY23 yield 17.4% 22.2% 6.3% 16.3%
Note: ITMG has disbursed their interim dividend. Estimated cum date based on historical disbursement.
Source: Company data, Verdhana research

Fig. 12: ADRO IJ 9M23F forecast table – expecting earnings exceeding consensus

ADRO 3Q23F Result

in USD mn 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY % to cons
Revenue 2,372 1,640 1,483 -10% -37% 5,913 4,962 -16% 81%
Gross Profit 1,340 683 620 -9% -54% 3,365 2,066 -39% 84%
Operating profit 1,251 554 503 -9% -60% 3,133 1,709 -45% 83%
Net Income 691 416 374 -10% -46% 1,903 1,248 -34% 83%

GPM 56.5% 41.6% 41.8% 56.9% 41.6%

OPM 52.8% 33.8% 34.0% 53.0% 34.4%
NPM 29.1% 25.3% 25.2% 32.2% 25.2%

ADRO 3Q23F operational 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY
Production vol (mn t) 17.4 17.7 16.9 -5% -3% 45.4 50.3 11%
Sales vol (mn t) 16.7 16.9 16.7 -1% 0% 44.2 49.3 12%
Blended ASP (USD/t) 139.6 96.0 81.4 -15% -42% 131.1 100.6 -23%
Source: Company data, Verdhana estimates

Fig. 13: HRUM IJ 9M23F forecast table – expect earnings exceeding consensus

HRUM 3Q23F results snapshot FY23F

in USD mn 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY %Cons
Revenue 325 198 161 -18.6% -50.5% 703 653 -7% 77%
Gross Profit 193 91 81 -10.3% -57.8% 437 335 -23% 79%
Operating Profit 150 66 60 -9.6% -59.9% 350 271 -23% 82%
EBITDA 157 83 77 -7.7% -51.3% 369 319 -14% 88%
Net Income 91 48 43 -10.7% -53.5% 237 193 -19% 79%

GPM 59.2% 45.8% 50.5% 62.2% 51.2%

OPM 46.1% 33.6% 37.3% 49.8% 41.4%
EBITDA 48.3% 41.9% 47.6% 52.6% 48.8%
NPM 28.1% 24.1% 26.4% 33.8% 29.6%

HRUM 3Q23F operational

in USD mn 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY
Production vol (mt) 1.5 1.7 1.7 0.0% 15.6% 3.8 5.1 36%
Sales vol (mt) 1.8 1.8 1.8 0.0% 0.0% 3.8 5.4 42%
ASP (USD/t) 183.4 109.8 89.4 -18.6% -51.3% 179.9 121.0 -33%
Source: Company data, Verdhana estimates

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Verdhana | Coal sector outlook 23 October 2023

Fig. 14: ITMG IJ 9M23F forecast table – expect earnings below consensus due to high mining costs

ITMG 3Q23F result

in USD mn 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY % of FY23F % to cons
Revenue 1,195 614 536 -13% -55% 2,616 1,835 -9% 72% 74%
Gross Profit 658 191 177 -7% -73% 1,407 635 -39% 67% 64%
Operating Profit 604 153 144 -6% -76% 1,273 518 -44% 71% 63%
Net Income 433 124 119 -4% -72% 894 426 -33% 73% 69%

GPM 55.0% 31.2% 33.1% 53.8% 34.6%

OPM 50.5% 25.0% 26.8% 48.7% 28.2%
NPM 36.2% 20.2% 22.2% 34.2% 23.2%

ITMG 3Q23F operational 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY % of FY23F
Production vol (mn t) 4.6 4.4 4.8 9.1% 4.3% 12.3 13.0 7.9% 76.5%
Sales vol (mn t) 5.7 5.4 5.6 4.0% -1.5% 13.8 15.5 20.7% 79.4%
ASP ($/t) 210.5 113.6 95.5 -16.0% -54.6% 189.7 118.3 -25.4%
OB removal (m bcm) 46.9 55.0 55.2 0.4% 17.6% 130.4 153.6 19.9%
Stripping ratio 10.2 12.5 11.5 10.6 11.8

Source: Company data, Verdhana estimates

Fig. 15: PTBA IJ 9M23F forecast table – expect earnings below consensus due to high mining costs

PTBA 3Q23F results snapshot

in IDRbn 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY % to cons
Revenue 12,648 8,901 8,270 -7% -35% 31,071 27,128 -13% 67%
Gross Profit 5,524 2,041 2,131 4% -61% 13,876 6,230 -55% 54%
Operating Profit 4,846 1,388 1,524 10% -69% 11,803 4,270 -64% 53%
Net Income 3,845 1,613 1,621 1% -58% 10,001 4,397 -56% 66%

GPM 43.7% 22.9% 25.8% 44.7% 23.0%

OPM 38.3% 15.6% 18.4% 38.0% 15.7%
NPM 30.4% 18.1% 19.6% 32.2% 16.2%

PTBA 3Q23F operational 3Q22 2Q23 3Q23F QoQ YoY 9M22 9M23F YoY
Production vol (mt) 11.8 12.0 10.8 -10% -8% 27.7 29.6 7%
Sales vol (mt) 8.9 8.6 8.9 3% 0% 23.5 26.3 12%
ASP (IDR'000/ton) 1,421 1,035 929 -10% -35% 1,322 1,032 -22%
ASP (USD/t) 95.2 69.6 61.9 -11% -35% 90.5 68.8 -24%
Source: Company data, Verdhana research

Fig. 16: List of potential high yield stocks - coal are amongst the top dividend yield

Source: Company data, Verdhana research

Note: Estimated payout using average historical data, dividend calculation based on annualized EPS. Stock with (*) using our forecast number.

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INVESTMENT RATINGS
A rating of ‘Buy’, indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of
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