Tuesday, July 19, 2011

Adaro Energy - Turning on the Power

by CLSA securities

Our mining analyst Jayden has just written an update on the company’s plan to move further downstream into the domestic power sector. ADRO-JPower-Itochu consortium has signed an LOI with the Indo govt for the 2x1,000MW IPP in Central Java. Outperform with TP of Rp2,800.

We see the move into power as positive over the medium to long term for the following reasons:

Creating base demand for ADRO’s lower energy Wara coal (4,000kcal/kg), which will represent the majority of incremental future production.

Thus, the power plant project will give ADRO some leverage in dealing with future coal buyers.

State owned power company PLN, under new management, bears several key risks of coal price and exchange rate. This provides more stable returns to investors over the 25 year contract life.

Other key points from the meeting:

ADRO-JPower-Itochu consortium has signed an LOI with the Indonesian Government for the 2x1,000MW Pemalang IPP in Central Java.

ADRO owns 34% of the 2x1,000MW Pemalang IPP in Central Java and plans to supply 7mt of the 9mt annual coal requirement. PLN bearing several key risks.

ADRO is also submitting bids in for two more power projects, although with less scale than the first. Partnering with KEPCO for a US$350m 2x100MW project in South Kalimantan, and with Mitsubishi in 1x660MW power plant in West Java.

While we estimate returns to shareholders will be above ADRO’s WACC, the forecast start date of 2017 will have no bearing on near term valuations for the stock.

Any additional power tenders won will have similar construction lead times. Neutral near term impact on valuation.

Along with the rest of the Indonesian thermal coal players, Adaro has underperformed the JCI during 1H11. We keep our operating assumptions and TP unchanged.

Our earnings estimates are based on coal price forecasts of US$115/t and US$105/t respectively in 12CL and 13CL. Our 1 year fair value of Rp2,800 is based on a blended DCF and 12.5x 12CL PE, offering investors 13% upside.

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