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Thursday, April 14, 2011

Adaro Energy (ADRO)

by Kresna Securities

We maintain BUY on the counter though reducing our TP to Rp2,725. The 17% spike on cash cost throughout 2010 has deviated our net income forecast by 18.8% while revenue met our forecast. We have decided to adjust our FY11-12 cash cost by 12.3%-7.9% to US$38.4/ton-US$35.7/ton while cutting production assumption by 2.1%-6.8% to 46mt-55mt, reducing our net income forecast by 15.7-12.2%. However, despite being hampered by negative sentiment, the outlook remains attractive. We forecast FY11-12 net income to jump by 102.6%-78.5% respectively. Currently, ADRO is trading at FY11 P/E of 15.9x.

· Stock might be blamed for the disappointment result. FY10 result was much below our estimate as well as the consensus. Although top line figure has met the expectations, the significant cash cost jump during 4Q10 has resulted to the disappointment results causing the bottom line to be deviated by 18.8% to our expectation and 16% to the consensus. We have adjusted our assumption on the issue, implying to a negative sentiment on the stock.

· Cut FY11-12 net income by 15.7%-12.2%. We have decided to cut our FY11-12 production target by 2.1%-6.8% to 46mt-55mt in anticipation to the plateauing production in Tutupan as well as the uncertainty mining equipment supply. On the other hand, we have also raised our FY11-12 cash cost assumption by 12.3%-7.9% to compensate higher planned strip ratio as well as fuel price which haven’t been hedged this year.

· Valuation is still undemanding. Despite having cut our estimate, the counter remains attractive in our opinion. The extreme weather has been started to ease since early this year and is expected to remain stable onward. Therefore, we do not expect ADRO to incur any significant demurrage cost this year. Our current estimate suggests that its outlook remains one of the best in the sector. We expect 17.5%-12.1% YoY jump on FY11-12 ASP, suggesting FY11-12 net profit to jump by 102.6%-78.5%.

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