Monday, April 11, 2011

Adaro Energy (ADRO)

by Kim Eng Securities

􀂃 We assign a BUY rating to Adaro. Our target price of Rp2,654 offers upside potential of 17%. Our EPS estimates for FY11‐12 are Rp122 and Rp189.

Our View

􀂃 The short‐term increase in cash costs (ex royalty) is our main concern. We estimate that cash costs would rise by 18% and 3% in 2011 and 2012 to US$41.8/ton and US$42.9/ton, respectively. Rising fuel price that constitutes >30% of the total cash cost is the main driver, coupled with an increase in the strip ratio from 5.5x in FY10 to 6.3x in FY11 at the Tutupan mine. Unlike in 2010, the company has not hedged its fuel consumption in 2011. Fuel price has increased by 15% YTD and by some 32%, in comparison to the average cost of US$79.4/bbl in 2010.

􀂃 We expect relatively strong volume growth for FY11‐12 with coal output and sales volume coming in at 46.5m tons and 54m tons, respectively. We estimate output would gradually rise to 74m tons by 2015. Production growth at Tutupan is slowing down as the mine is nearing its optimum production capacity of 50m tons, lower than the initial projection figure of 55‐60m tons. Additional coal comes mostly from Wara, which has lower CV quality (lower price). At the same time, it also has a lower stripping ratio that in turn means lower costs.

Action & Recommendation

􀂃 We derive our target price of Rp2,654 from DCF based on e mine‐life and the WACC of 12%. Our target price implies a valuation of 14.1x FY12x, suggesting a premium of 2% over the sector. With upside potential of 17%, the stock warrants a BUY rating.

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