Wednesday, June 15, 2011


by CLSA Securities

Adaro joins a growing list of Indonesian coal producers who are expanding into power generation. We expect the valuation impact of this move to be neutral given the long time period before project cashflows are realised. We downgrade our price target to Rp2,800 and our recommendation from Buy to Outperform due to higher forecast operating costs at the existing mines. Adaro's ambitious capex plans will provide fuel for growth in its quest for production of 80mt.

Venturing further down the value chain

Adaro's relentless pursuit of vertical integration is leading it down the Independent Power Producer path - one that is very much in vogue at the moment with Indonesian producers. We expect Adaro's 34% share in the US$3.2b Pemalang IPP to have a neutral near term impact on valuation. While returns to shareholders will be above Adaro's WACC, the forecast start date of 2017 will have no bearing on near term valuations.

All signs point to a near-term acquisition

There is continued strong demand for Indonesian coal, especially Adaro's clean low rank product which is well suited to Indian power producers. We forecast Adaro production at 48Mt in 11CL and 53Mt in 12CL. A new US$750m 10 year credit facility also allows for acquisitions and capex, meaning Adaro now has access to US$1.2b cash and undrawn credit lines to support growth ambitions.

Aggressive Capex to fuel 12% CAGR production growth

For 2011, Adaro plans to spend US$625m on capex projects at its existing mines in the pursuit of its 80mt per annum production target. The indefinite hiatus on the overland conveyer project and updated company guidance has led us to revise our forecasts on production cash costs at Tutupan and Wara up from US$35/t to US$44/t in 11CL and US$35/t to US$45/t in 12CL.

Downgrade price target to Rp2,800 implying 17% upside

We value the stock on a blend of DCF and 12.5x 12CL PE. This reduces our fair value to Rp2,800 and our recommendation to Outperform. We have revised down earnings to reflect higher operating costs. In addition, differences with consensus reflect CLSA volume and cost assumptions. We have restated the company's financial statements to USD.

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