In 2022, the intersection of heightened global demand for coal and supply constraints resulted in remarkably constrained coal markets and unprecedented price levels. Following Russia's invasion of Ukraine, there was a general escalation in energy prices, with a notable shift towards coal-fired generation in response to elevated gas prices in numerous countries.
Additionally, a temporary export prohibition implemented by the Indonesian government in January 2022 to address domestic shortages contributed to a reduction in the availability of thermal coal in the market. Furthermore, the European Union impose a ban on Russian coal, and constraints in eastbound rail transport impeded the diversion of a portion of these supplies to alternative markets.
Consequently, as a confluence of these factors, the prices of ICE Newcastle coal price exceeded USD400/ton on multiple occasions throughout the year 2022. However, after coal price has normalized, ICE Newcastle price remain above pre energy crisis level, trading well above USD100/ton whilst ICI 4 has been stable above USD57/ton for the last 4 months.
Source: Bloomberg
We see that coal price possibly may have found a new equilibrium price level due to the geopolitical turmoil which remain unresolved up to this day. Thus, we believe amidst the escalating tension on global geopolitics, there’s a silver lining for coal industry which may offset the downside risk from slower global economy recovery.
Very recently, our team had a meeting with PT ABM Investama Tbk. (ABMM), an integrated mining and energy-related company whose portfolio includes resources, services, and infrastructure in the mining sector, primarily coal.
What we found interesting from the company is that even after the acquisition of 30% GEMS stake for IDR6.2tn, the company is still in acquisition mode. Currently, the company has a DER of 1.5x and a ceiling DER of 2x, allowing the company to issue debt up to IDR7.7tn for further acquisition.
As of January 19, 2024, ABMM trades at approximately 1.9x PE and 0.9x PBV. In our view, this valuation remains very undemanding when compared to the industry average multiples, especially considering the company's superb ROE, currently exceeding 50%.
Source: Bloomberg
To top the attractiveness of company’s valuation and profitability, 43% of the company’s EBITDA is derived from contract mining services. This characteristic makes the company's performance less sensitive to the volatility of coal prices, providing a buffer in case sudden events alter the economic trajectory.
Considering all of the above, we believe ABMM is one stock worth considering to go long on coal industry as it offers undemanding valuation. We believe ABMM deserve for a rerating on the back of strong and relatively stable financial performance amidst another possible acquisition in not so distant future.