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EQUITY RESEARCHCIPTADANA SEKURITAS ASIA

Please see analyst certification and other important disclosures at the back of this report 2

ITMG – Site Visit Report - 02 October 2017

BUY Indo TambangrayaTP: Rp26,950 (+33.1%) Is the glass half-full or half-empty?

The expression “is the glass half-full or half-empty?..” has for so many years highlightedthe tendency for two people to see the same situation in different ways. It is commonlyused to emphasize the difference between positive and negative thinking, or optimism andpessimism. Correlating such expression with Indo Tambangraya Megah Tbk (ITMG)reserves, it is understandable that one may use half-empty expression given its shrinkingreserves. However, we opt for half-full of glass expression after visiting the company’ssubsidiary, Indominco Mandiri (IM) mine sites, recently.

A well-developed integrated mine siteIM has mining concession area of 24,121 ha, spanning from Bontang to Kutai Kertanegaradistricts, located around 117 km to the north of Samarinda, East Kalimantan’s provincecapital city. The area consists of two large blocks, East Block (7,021 ha) and West Block(17,100 ha), with East Block contributes the most (~87.5%) to the IM’s production. We seethat IM has an integrated mine site as it already complete with infrastructures, such as inpit crushing and conveying (IPCC), crushing plants, washer, etc. A 35 km asphalted haulingroad also connects the furthest part of this concession, the West Block, to IM’s port. Thehauling road is monitored by latest technology, to ensure no holes or decreasing roadsurface that may lead to higher maintenance costs, increasing fuel expenses, as well asinefficient distribution time. IM’s shipping process point is located at Bontang CoalTerminal (BoCT), where dumping loops and continuous barge unloading facility are set tounload coal from either internal or third parties. Large stockyard (capacity of 500,000tons), crushers, 4 km overland and 2.5 km sea conveyor belt, as well as 2x7 MW powerplants are in place to support IM’s shipping process. BoCT also has a control room tomonitor activities at the terminal.

Expecting an increase of reservesOur talk with IM’s planning head has given an insight to IM’s 2016 reserves of 59.9 mntons. It was based on the coal price assumption of USD65/ton, a price which we deemsignificantly lower than the average benchmark price (Newcastle) of USD84.9/ton in 9M17.With the latter price, the company believes that it may push its pit wall further, increase itsstripping ratio, revive its abandoned mines in West Block area, and perform undergroundor auger mining method to turn its resources into mineable resources. Thus, we expectIM’s reserves life to extend to more than 10 years as we foresee higher mineable reservesgiven the above factors.

Reiterate Buy recommendation with TP Rp26,950/shareAt this juncture, we maintain our 2017-18F earnings forecast as we continue to upbeat onITMG’s earnings growth supported mostly by 1) higher coal prices and 2) mining costefficiencies. ITMG remains our top pick in the coal sector on its limited exposure todomestic market, lessening investors’ fear from domestic coal price proposal that lower-than-market pricing which may reemerge in the future. We maintain our Buyrecommendation on ITMG as our TP of Rp26,950 still provides 33.1% potential upside. Itimplies 2018F PER of 9.0x, still lower than 5 years average of 11.7x.

Sector Coal

Bloomberg Ticker ITMG IJ

Share Price Performance

Last price (Rp) 20,250

Avg. daily T/O (Rpbn/USDmn) 33.5/2.5

3m 6m 12m

Absolute (%) 10.7 -1.0 57.3

Relative to JCI (%) 9.8 -5.4 47.5

52w High/Low price (Rp) 22,300/10,925

Outstanding shrs (mn) 1,130

Mkt. Cap (Rpbn/USDmn) 22,881/1,694

Estimated free float (%) 29.8

Major shareholders

Banpu Minerals 65.1%

EPS Consensus

Ciptadana Cons. % Diff

2017F 18.2 19.5 -6.8

2018F 22.5 18.1 24.4

2019F 24.4 18.5 31.9

Kurniawan Sudjatmiko+62 21 2557 4800 ext.739

[email protected]

http://www.ciptadana.com

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ITMG 1yr Rel. to JCI (RHS)

Exhibit 1 : Financial Highlights

Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Revenue (USDmn) 1,589 1,367 1,723 1,896 2,081

Operating profit (USDmn) 194 209 313 386 419

Net profit (USDmn) 63 131 205 254 276

EPS (US$Cents) 5.6 11.6 18.2 22.5 24.4

EPS growth (%) -68.5 107.1 57.0 24.0 8.4

EV/EBITDA (x) 6.5 5.3 4.2 3.3 3.1

PER (x) 27.2 13.1 8.6 6.9 6.4

PBV (x) 2.1 1.9 1.7 1.6 1.5

Dividend yield (%) 6.7 2.4 5.5 8.7 10.8

ROE (%) 7.6 14.4 20.2 22.8 23.0

Source : ITMG, Ciptadana Estimates




IM at a glanceIM traces its history back to 1988 when it was firstly established. IM’s mining contract withthe government was signed in 1990, and followed with its first mine survey in 1990 – 1991.Exploration and feasibility study was done in 1992 – 1995 periods, and the company shippedits coal for the first time in 1997 using only temporary facilities. IM finished the constructionof permanent facilities and started to ship its coal using these facilities in 1999. Two yearslater, IM was acquired by Banpu – Thailand. At the beginning, IM managed mining areaconcession of 99,922 ha, and gradually relinquished some of these areas to 24,121 hatoday’s. IM mine site is located in three districts in the province of East Kalimantan, namelyBontang, East Kutai and Kutai Kertanegara. IM mine sites consist of two large blocks, WestBlock – covering an area of 17,100 ha and East Block – covering an area of 7,021 ha.

Exhibit 2: ITMG and IM’s operational area

Source : ITMG




The biggest contributor to ITMG’s coal productionIM produces coal with calorific value of 5,600 – 6200 kal/g with sulfur content of 0.70 –1.80%, a medium quality compare to other ITMG’s subsidiaries production (exhibit 3). As ofDecember 2016, IM has total resources of 719 mn tons with total reserves of 59.9 mn tons,second highest than PT Bharinto Ekatama’s reserves (another ITMG’s subsidiaries). In 2017,IM is expected to produce 14.2 mn tons of coal, the biggest contributor to ITMG’s totalproduction target of 23.8 mn tons (59.6% contribution). As of 1H17, IM already produced 6.4mn tons, of which 5.7 mn tons came from East Block. The company looks on-track to reachthe annual production target.

Exhibit 3: ITMG’s typical coal products specification

Subsidiary Calorific value (cal/g) (arb) Sulfur content (arb)

PT Indominco Mandiri 5,600 – 6,200 0.70 – 1.80%

PT Trubaindo Coal Mining 6,100 – 6,300 0.75 – 2.00%

PT Bharinto Ekatama 6,100 – 6,300 0.70 – 1.50%

PT Kitadin 5,400 – 5,600 0.10 – 0.30%

PT Jorong Bautama Greston 4,300 – 4,400 0.20 – 0.40%

Source : ITMG

Exhibit 4: ITMG’s reserves and resources (as of Dec.31, 2016)

Source : ITMG

Exhibit 5: ITMG’s quarterly production

719.8

390.3

216.4151.1 139.7

59.9 39.694.4

3.4 1.00

100

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400

500

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800

PT IndomincoMandiri

PT Trubaindo CoalMining

PT BharintoEkatama

PT Kitadin PT Jorong BautamaGreston

Mn tonsResources Reserves

4.03.7 3.8

3.2 3.2

1.4 1.6 1.7

1.1 1.00.6 0.6 0.8 0.6 0.50.3 0.1 0.1 0.2 0.20.2 0.2 0.3 0.2 0.2

0.00.51.01.52.02.53.03.54.04.5

2Q16 3Q16 4Q16 1Q17 2Q17

Mn tons

Indominco Trubaindo Bharinto Kitadin Jorong




Owns an integrated coal siteFrom the capital city of East Kalimantan, Samarinda, IM’s coal concession area is locatedaround 117 km to the north, or around three hours driving. Other than East Block and WestBlock, this mine site is also has several infrastructures such as sea ports, three coalcrushing plants, one washing plants, in pit crushing and conveying (IPCC), inland and seaconveyor belt, run-of-mine (ROM) stock pile, mine stockyard, coal-based power plant, and 35km of asphalted hauling road that connects IM’s port stock yard and West Block mine site(the furthest location from port). With this integrated facilities, IM is able to mine, crush,wash, blend, and also shipped its coal in one location, providing cost efficiencies in its miningactivities.

Exhibit 6: IM’s integrated coal site

Source : ITMG

A well-managed hauling roadWe were surprised when we arrived at IM’s mine site, as its hauling road is alreadyasphalted. It connects each location or facilities at the mine site, which we think only fewmining companies in Indonesia have this kind of infrastructure. The hauling road is relativelywide (about 10 meters), big enough for two lines of truck. The road is also smooth and wellmanaged, as the company has technology to monitor the road condition. Decreasing roadsurface or road holes will be reported, and the company will conduct maintenance activitiesbased on this report. Given the smooth road condition, IM is able to reduce its maintenancecosts for its heavy equipments’ tires, fuel usage, as well as keep the distribution time at itsefficient level. The road also has road signs as well as traffic lights at intersections. IM evenassigns people to manage the traffic on the road locations being repaired.

Exhibit 7: Road signs at IM’s hauling road

Source : ITMG




Exhibit 8: Security at mine’s entrance

Source : ITMG

Implement efficient and eco-friendly mining practicesFrom the entrance gate, we went to the IM’s office to get brief explanation about IM’s miningactivities. Based on that and our visit to East Block site afterward, we understand the reasonbehind IM received ISO 14000:2004 Mining Certification and Green Certificate Award in 2016.Mining operation wise, we see IM practices an efficient mining activity as it gradually cuts itsmine with relatively moderate slope level, not a steep one; provide easiness for the heavymachineries to take the waste materials as well as coal. Water flow management alsobecome one of IM’s concern, as IM opens pit with different level of depth, providing ways forwater to move to the deepest pits when raining, leaving higher pits drier and still reliable formining activities. East Block has four pits with average length of 2 km for each pit. This blockalso has 13 coal seams with average thickness of 4 – 6 meters, thicker than the West Blockarea. Thus, it is reasonable for IM to use In-Pit Crushing and Conveying (IPCC) system in EastBlock, to reduce its cost for moving materials from this block. The IPCC system consists oftwo mobile crusher units and one conveyor belt with around 2.5 km of length and capacity of9,000 tons/hour. IM also practices an eco-friendly mining activities as they continue to closethe abandoned pits with soils and plants. IM also encourages its employees to do plantingactivities at its mine sites by launching Ayo Menanam di Tambang slogan.

Exhibit 9: One of East Block’s pits – water stays at the deepest pit

Source : ITMG




Exhibit 10: Abandoned pit – has been replanted (at left)

Source : ITMG

Increasing reserves is imminentWe also talked with IM’s mine planning head, and got information that IM’s reserves in 2016was based on the coal price assumption of USD65/ton, which was significantly lowercompare to the average benchmark price of USD84.9/ton in 9M17. Using this healthy pricelevel, IM believes that they may push its pit wall further, increase its stripping ratio, revive itsabandoned mines in West Block area, and perform underground or auger mining method toturn its resources into mineable reserves. Based on average annual production of 13 – 16mn tons per year, IM’s reserves are expected to last in 2021 – 2022. However, judging bycurrent coal price condition, IM’s reserve life may extend to 2024 – 2025. Such measure stillexcludes the reviving of several mine sites in West Block area. Thus, we see that IM still hasat least ten years before all the reserves run out.

Exhibit 11: Newcastle coal price (USD/ton)

Source : Bloomberg

Fast and controllable shipping process at Bontang Coal TerminalLastly, we visited Bontang Coal Terminal (BoCT), IM’s port and coal shipping facilities,constructed in 1999. At this terminal, coal is received from either IM’s mine sites, sistercompanies Kitadin Embalut, or third parties for blending purposes. Dumping loops as well ascontinuous barge unloading facility are set to unload coal from dump trucks or barges. Thegathered coal is placed at BoCT’s stockyard, which has capacity of 500,000 tons. Crushing,blending and washing activities take place at around stockyard. Mostly, coal stays at thestockyard for about a week.

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2016 Avg price USD65.6

9M17 Avg price USD84.9




Exhibit 12: Continuous Barge Unloading facility

Source: ITMG

After such process, coal is pushed into dedicated feeders by bulldozers and then transported usingconveyor belt into barges or vessels. The conveyor belt system is consists of a 4 km overland conveyorbelt and 2.5 km sea conveyor belt with total loading capacity of 3,500 tons/hour. With this conveyor belt,the shipping process to large vessels, i.e. Panamax vessel (95,000 DSWT), is relatively faster or finishedin just one day. Contrarily, the same process may take five to six days with sea cranes. BoCT also has acontrol room to monitor activities around the terminal using CCTVs.

Exhibit 13: Inland conveyor belt

Source: ITMG

Exhibit 14: Control room

Source: ITMG




Exhibit 15: P/E Ratio Band

Source: Bloomberg

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avg 11.7x

+0.5 stdev14.5x

+1.0 stdev17.3x

-0.5 stdev8.9x

-1 stdev 6.2x


EQUITY RESEARCHITMG – Site Visit Report - 02 October 2017

CIPTADANA SEKURITAS ASIA

Exhibit 16 - Income Statement

Year to 31 Dec (USDmn) 2015A 2016A 2017F 2018F 2019F

Revenue 1,589 1,367 1,723 1,896 2,081

COGS -1,239 -1,037 -1,298 -1,386 -1,519

Gross profit 350 331 425 509 562

Oper. expenses -157 -122 -111 -123 -143

Oper. profit 194 209 313 386 419

EBITDA 224 260 354 459 518

Interest income 4 2 7 6 5

Interest expense -1 -1 -1 -1 -1

Other income (exp.) -57 -18 -18 -18 -18

Pre-tax profit 139 192 301 374 405

Income tax -76 -61 -96 -119 -129

Minority interest 0 0 0 0 0

Net profit 63 131 205 254 276

Exhibit 17 - Balance Sheet


Cash & cash equivalent 268 328 283 240 182

Acct, receivables 112 125 153 169 185

Inventory 117 62 121 129 142

Other curr, asset 15 24 33 35 38

Total current asset 512 539 590 573 547

Fixed assets - net 272 240 428 569 706

Other non-curr.asset 394 430 331 337 351

Total asset 1,178 1,210 1,349 1,479 1,603

ST debt + curr. maturity 0 0 0 0 0

Acct, payable 121 94 133 142 156

Advances received 0 0 0 0 0

Other curr. liab 164 145 132 148 169

Long term debt 0 0 0 0 0

Other non-curr, liab, 59 64 68 73 78

Total liabilities 344 302 334 363 403

Shareholder equity 835 907 1,015 1,116 1,201

Minority interest 0 0 0 0 0

Total liab + SHE 1,178 1,210 1,349 1,479 1,603

Exhibit 18 - Per Share Data

(US$Cents) 2015A 2016A 2017F 2018F 2019F

EPS 5.6 11.6 18.2 22.5 24.4

BVPS 0.7 0.8 0.9 1.0 1.1

DPS 10.1 3.6 8.7 13.6 16.9

FCF per share 0.2 0.2 0.0 0.1 0.1





Exhibit 19 - Cash Flow


Net income 63 131 205 254 276

Depreciation 30 51 40 73 100

Chg in working cap. 79 15 30 -7 -11

Other -6 -6 4 5 5

CF-Oper activities 166 191 280 325 369

Capital expenditure 3 -20 -228 -214 -236

Others 0 0 0 0 0

CF-Investing activities 3 -20 -228 -214 -236

Net change in debt 0 0 0 0 0

Net change in equity -1 -17 0 0 0

Dividend payment -127 -94 -97 -154 -191

Other financing 0 0 0 0 0

CF-Financing activities -128 -111 -97 -154 -191

Net cash flow 42 60 -45 -43 -58

Cash - begin of the year 226 268 328 283 240

Cash - end of the year 268 328 283 240 182

Exhibit 20 - Key Ratios

Year to 31 Dec 2015A 2016A 2017F 2018F 2019F

Growth

Revenue (%) -18.2 -14.0 26.0 10.0 9.8

Operating profit (%) -18.0 7.7 50.2 23.4 8.3

Net profit (%) -68.5 107.1 57.0 24.0 8.4

Profitability Ratios

Gross margin (%) 22.0 24.2 24.6 26.9 27.0

Operating margin (%) 12.2 15.3 18.2 20.4 20.1

EBITDA margin (%) 14.1 19.0 20.5 24.2 24.9

Net margin (%) 4.0 9.6 11.9 13.4 13.2

ROA (%) 5.4 10.8 15.2 17.2 17.2

ROE (%) 7.6 14.4 20.2 22.8 23.0

Liquidity Ratios

Current ratio (x) 1.8 2.3 2.2 2.0 1.7

Quick ratio (x) 1.4 2.0 1.8 1.5 1.2

Cash conversion cycle (days) 34.2 24.8 39.4 38.5 38.9

Activity Ratio

Inventory turnover (days) 34.6 21.8 34.0 34.0 34.0

Receivable turnover (days) 32.4 31.6 29.5 31.0 31.1

Payable turnover (days) 32.8 28.6 24.1 26.6 26.2

Solvency Ratio

Interest cover (x) 205.6 284.6 387.8 503.6 568.2

Debt to equity ratio (x) 0.0 0.0 0.0 0.0 0.0

Net debt to equity (x) Net Cash Net Cash Net Cash Net Cash Net Cash





EQUITY RESEARCH

HEAD OF RESEARCH ANALYST ANALYSTArief Budiman Erni Marsella Siahaan, CFA Yasmin SoulisaStrategy, Automotive, Heavy Equipment, Banking Property, PlantationsConstruction, Shipping T +62 21 2557 4800 ext 919 T +62 21 2557 4800 ext 799T +62 21 2557 4800 ext 819 E [email protected] E [email protected] [email protected]

ANALYST ANALYST ANALYSTKurniawan Sudjatmiko Nichelle Ongko Niko MargaronisCoal, Metal Mining, Oil & Gas and Services Media, Retail, Others Telecommunication, Tower, HealthcareT +62 21 2557 4800 ext 739 T +62 21 2557 4800 ext 740 T +62 21 2557 4800 ext 734E [email protected] E [email protected] E [email protected]

JUNIOR ECONOMIST ANALYST TECHNICAL ANALYSTImanuel Reinaldo Fahressi Fahalmesta Trevor GasmanT +62 21 2557 4800 ext 820 Cement, Toal Road, Poultry T +62 21 2557 4800 ext 934E [email protected] T +62 21 2557 4800 ext 735 E [email protected]

E [email protected]

RESEARCH ASSISTANTSumarniT +62 21 2557 4800 ext 920E [email protected]

EQUITY SALES

Co HEAD OF INSTITUTIONAL SALES Co HEAD OF INSTITUTIONAL SALESDadang Mulyana The Fei MingPlaza ASIA Office Park unit 2 Plaza ASIA Office Park unit 2Jl. Jend. Sudirman Kav. 59 Jl. Jend. Sudirman Kav. 59Jakarta - 12190 Jakarta - 12190T +62 21 2557 4800 ext 838 T +62 21 2557 4800 ext 807F +62 21 2557 4900 F +62 21 2557 4900E [email protected] E [email protected]

SURABAYABRANCH OFFICES

SURABAYAJAKARTA - MANGGA DUA JAKARTA - PURI KENCANA SURABAYAKomplek Harco Mangga Dua Perkantoran Puri Niaga III Intiland Tower SurabayaRukan Blok C No.10 Jl. Puri Kencana Blok M8 No.2E Ground Floor Suite 5 & 6Jl. Mangga Dua Raya Kembangan Jl. Panglima Sudirman 101-103Jakarta - 10730 Jakarta - 11610 Surabaya - 60271T +62 21 600 2850 T +62 21 5830 3450 T +62 31 534 3938F +62 21 612 1049 F +62 21 5830 3449 F +62 31 534 3886

SEMARANGGedung Menara Suara Merdeka6th Floor Unit 02Jl. Pandanaran No.30Semarang - 50134T +62 24 7692 8777F +62 24 7692 8778




Analyst Certification

Each contributor to this report hereby certifies that all the views expressed accurately reflect his or her personal views about thecompanies, securities and all pertinent variables. It is also certified that the views and recommendations contained in this report are notand will not be influenced by any part or all of his or her compensation.

Disclaimer

This report does not constitute an offer to buy or sell any security/instrument, invitation to offer or recommendation to enter into anytransaction. Nor are we acting in any other capacity as a fiduciary to you. When making and investment decision, you should determine,without reliance upon us or our affiliates, the economic risks and merits (and independently determine that you are able to assume theserisks) as well as the legal, tax and accounting characterizations and consequences of any such transaction. In this regard, by accepting thisreport, you acknowledge that (a) we are not in the business of providing (and you are not relying on us for) legal, tax or accounting advice,(b) there may be legal, tax or accounting risks associated with any transaction, (c) you should receive (and rely on) separate and qualifiedlegal, tax and accounting advice and (d) you should apprise senior management in your organization as to such legal, tax and accountingadvice (and any risks associated with any transaction and our disclaimer as to these matters.

The information contained in this report is based on material we believe to be reliable; however, we do not represent that it is accurate,current, complete, or error free. Assumptions, estimates and opinions contained in this report constitute our judgment as of the date of thedocument and are subject to change without notice. Any projections are based on a number of assumptions as to market conditions andthere can be no guarantee that any projected results will be achieved. Past performance is not a guarantee of future results. PTCIPTADANA SECURITIES AND ITS AFFILIATES SPECIFICALLY DISCLAIMS ALL LIABILITY FOR ANY DIRECT, INDIRECT, CONSEQUENTIAL OROTHER LOSSES OR DAMAGES INCLUDING LOSS OF PROFITS INCURRED BY YOU OR ANY THIRD PARTY THAT MAY ARISE FROM ANYRELIANCE ON THIS REPORT OR FOR THE RELIABILITY, ACCURACY, COMPLETENESS OR TIMELINESS THEREOF.

Analyst Certi ficationDisclaimer: This document is not intended to be an offer, or a solicitation of an offer, to buy or sell relevant securities (i.e. securitiesmentioned herein or of the same issuer and options, warrants or rights to or interest in any such securities). The information and opinionscontained in this document have been compiled from or arrived at in good faith from sources believed to be reliable. No representation orwarranty, expressed or implied, is made by PT CIPTADANA SECURITIES or any other member of the Ciptadana Capital, including any othermember of the Ciptadana Group of Companies from whom this document may be received, as to the accuracy or completeness of theinformation contained herein. All opinions and estimates in this report constitute our judgment as of this date and there can be noassurance that future results or events will be consistent with any such opinions, forecasts or estimates. The information in this documentis subject to change without notice; its accuracy is not guaranteed; and it may be incomplete or condensed.

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