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Sunday, May 8, 2011

Production on track - Adaro Energy

by Samuel Securities

Highlights:

• PT Adaro Energy (ADRO) reported 1Q11 net earnings of US$109mn, grew by 11.3% YoY or 89.5% qoq and represents around 21.4% of our FY11 estimates. Net revenue increased by 11.7% YoY or 2.7% qoq to US$757 mn, around 21.9% of our FY11 estimates.

• Coal production volume and sales volume declined by 6.8% and 4.8%, respectively in 1Q11, however ASP increased by 16.3% YoY due to better pricing conditions.

• Adaro has changed its financial statements in USD from 2011 onwards, to minimize forex translation effect as most of income, cost and debt are denominated in US$.

Comments:

• Higher net earnings were mainly due to higher ASP, forex gain of US$8.7 mn and no goodwill amortization as compared to US$13mn incurred last period.

• On the cost side, COGS increased by 16.5% YoY due to higher planned strip ratio (from 5.0x to 6.4x), longer overburden hauling distances and higher fuel prices. Consequently, cash cost rose by 27% YoY to US$38.5/ton. Gross and operating margin declined to 33% (from 35.7%) and 28.9% (from 32.7%), respectively.

• Down time due to repairs and maintenance of some heavy equipment contributed to lower production volume during 1Q11. However, 1Q11 coal production of 10.6mn ton has reached 22.5% of our FY11 target. As 1Q production tends to be lowest, we believe Adaro is on track to achieve our FY11 target of 47 mn ton.


• ASP came in at US$63.8/ton in 1Q11 vs our FY11 estimates of US$72.1/ton. However, some of the tonnages delivered during 1Q11 still used last year’s pricing as negotiations had yet to conclude. Hence we expect higher ASP from 2Q11 onwards.

Action & Recommendation:

• Adaro has underperformed market by 15% YTD due to 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, with price target Rp2,800/share, implies 14.1x PER’12. MAINTAIN BUY

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