Thursday, September 8, 2011

Adaro Energy

by Kresna Securities

We maintain our TP at Rp2,725, followed with a BUY recommendation. 1H11 net income figure grew 103.8%YoY to US$268m, supported by higher ASP (23%YoY) and augmented production volume (5.5%YoY). Compared to our estimates, top and bottom lines arrived at 51.3% and 55.0% of our estimates, respectively.

Going forward, we see a possibility that production may outperform our FY11 expectation, in line with additional mining fleets and a supportive weather forecast; ADRO 1H11 production has arrived at 49.6% of our FY11E, versus an industry average of 40-45%. On the other hand, we also see a possibility that ADRO may book US$153m as other expenses in 3Q11.

Key Catalysts

Revenue increased 35.8%YoY to US$1,771m. Robust revenue growth was in line with ASP rising (23%YoY) to US$68/ton. Meanwhile, production accelerated strongly in 2Q11 after ADRO received an adequate supply of mining fleets. Thus, 1H11 production figure climbed 5.5%YoY; contrast this with 1Q11 production, which was 6.7% lower compared to 1Q10.

Cash costs rose to US$40/ton in 1H11. The number went up 23%YoY in respect to rising oil prices and a longer hauling road. Meanwhile, strip ratio realization came off as planned, but higher compared to last year; the actual strip ratios for Tutupan and Wara were 6.4x and 2.0x, respectively.

Net income doubled to US$268m. The strong number at the bottom was supported by both operating and non-operating lines. Operating income grew 38.2%YoY to US$537m, in line with robust revenue growth. On the flip side, non operating line recorded US$13.2m forex gain in 1H11 (versus nearly US$1.0m loss in 1H10) and no more amortization of goodwill (as compared to a US$26.8m charge last year).

Cleared customer’s claims overhang. Last week, ADRO cleared the uncertainty of potential claims worth US$399m from customers which lingering from several years ago. At that time, ADRO declared force majeure, and suspended deliveries to three customers, complying with the Ministry of Energy and Mineral Resources policy which requested Indonesia coal miners renegotiate existing coal supply contracts to conform more closely to the current market price. However, with the payment of US$153m, all claims have now been resolved.

Earnings Outlook

Maintain our production, ASP and cash cost projections. We believe our FY11E production volume of 46mt is still on track. With sufficient heavy equipment and a better weather forecast, there is a potential that ADRO will indeed outperform our estimate this year. Meanwhile, our ASP and cash cost assumptions were inline with 1H11 results, deviating only by 1.4% and -4.1% respectively.

Potential one-off expense in 3Q11. Related to a customer claim paid in August 2011, we see the possibility that ADRO will record this US$153m as an expense in 3Q11. Should we assume this claim as an expense and leave other factors unchanged, our FY11E net income would be cut by 17.4% to US$401.7m

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