Tuesday, April 5, 2011

Adaro Energy (ADRO)

by Samuel Securities

Escalating cost

• PT Adaro Energy (ADRO) reported net profit of Rp 2,207 bn in FY10, declined by 49.5% YoY and around 16% and 22% below consensus and our estimates. Net revenue declined by 8.3% yoy to Rp24,689 bn, inline with consensus but 6.3% above our expectation.
• Despite bad weather, ADRO managed to book higher coal production of 42.2 mn ton (+4% YoY) and sales volume of 43.8 mn ton (+6% YoY), inline our expectation.


• Lower than expected net earnings were mainly due to higher cash cost, and demurrage charges incurred. COGS increased by 7% YoY due to higher planned stripping ratio (from 5.1x to 5.5x), longer overburden hauling distances and additional weather related costs.
• ADRO’s ASP came in at US$57.2/ton, lower than our expectation US$58.2/ton due to pending shipment of higher-end priced contracts. However, we expect better ASP in FY11 given the expiration of legacy contract.
• Management aims to increase coal production to 46-48 mn tonnes in FY11, driven by production ramp-up at Wara pit. However, management also expects higher stripping ratio of 5.9x (from 5.5x). We expect cash cost to remain high in 2011 given rising fuel prices.

Action & Recommendation:

• We cut our FY11-12 earnings forecast by 16%-8% on the back of higher cash cost. We expect short term pressure on the stock given potential consensus earning downgrades. However, with continuing robust coal price and Adaro’s plan to double production up to 80 mn ton in 2014, we believe Adaro’s outlook remain intact.
• We retain our BUY recommendation, but trim our price target to Rp2,800/share (from Rp3,250/share), implies 18.5x-13.4x PER’11-12. Positive catalyst will come from the commencement of Maruwai coking coal project. Current share price weakness provides buying opportunity. MAINTAIN BUY

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