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Wednesday, November 16, 2011

Adaro Energy

by Kresna Securities

We maintain our BUY rating on ADRO and introduce our new 12-month TP of Rp3,025 (implying P/E target of 14x) as we roll-over our base year to 2012. In 9M11, company outstandingly showed strong operational results (revenue to net profit have arrived at 77.1%-84.7% to FY11E) on the back of a 18.4% YoY in coal sales volume and 25% YoY increase in ASP. On the other hand, we incorporate the US$153m customer claim and upgrade operational estimate in 2011 but cut production assumption in 2012 by 6.4% to 51.5mt, resulting to slight increase to our net profit projection by 0.9% to US$491.2m in 2011 and 9.8% cut to US$788.1m in 2012.

Key Catalysts

Strong revenue booked. Company remarkably posted US$2.9bn revenue, growing 47.7%YoY on the back of higher average selling price (ASP) and robust volume.

Production volume was on track at 35.3mt (+10.8% YoY) while coal sales volume were also strong at 38.3mt (+18.4% YoY), supported by robust coal trading activity (+591.8% YoY to 3.4mt). Meanwhile, ASP grew 25% YoY to US$70.7/ton, while on a QoQ basis, it continued to rise by around 4-5% QoQ, along with a higher portion of coal sold at index linked price. As an aside, the robust coal trading activity carried a selling price higher than average, also managed to push the ASP.

Cash costs increased 20.3% YoY to US$41.3/ton. The cash cost figure continued to escalate, the result of a higher strip ratio (5.5x in 9M10 vs 5.9x in 9M11), longer hauling road and higher fuel cost. When oil prices fell in 3Q11, company costs did not benefit, since they had already locked their oil purchase contract at US$0.8/liter. Meanwhile, jumping coal trading activity, which caused a 762.9% increase in coal purchases, also affected these rising costs.

One-time off was charged in Aug11. In 3Q11, company decided to record onetime off expense, amounting to US$153m, paid in Aug-11. Despite the charge, company’s net income managed to reach 77.1% to FY11E, while operating profit has reached 86.4%.

Earnings Outlook

FY11E: increase net profit by 0.9%. Due to unexpected robust coal trading activity volume, we raise our coal sales volume by 12.0% to 51.5mt for FY11E (included 1.0mt additional coal production from Wara). We also increase ASP by 4.5% to US$70.2//ton along with higher realization price and robust coal trading activity, which we believe the selling price is higher than the average. On the other hand, we also raise our cash cost assumption by 7.3% to US$41.2/ton, mainly triggered by a higher coal purchase assumption (for trading). These adjustments have yielded a 11.7% upward revision in our FY11 operating profit estimate to US$1.2bn. However, as we also incorporate the US$153m customer claim charges into our model, our new FY11 net profit estimate only increase by 0.9% to US$491m.

FY12F: Cut the production. We cut production volume for 2012, mostly from Wara, by 6.4% to 51.5mt as we assume company won’t significantly ramp up production in Wara, instead of try to start producing from new acquired assets. But, while the production schedules as well as legal status remains unclear, we decide not to incorporate the contribution at the moment. Meanwhile, for the coal trading business, we conservatively assume coal trading activity to slow in 2012, anticipating coal sales volume will arrive at 52.6mt (4.3% cut). Hence, we now only assume an increase in ASP and cash cost assumptions by 1.6% and 10.8%, respectively, to US$76.5/ton and US$39.7/ton. Incorporating the abovementioned, we cut our FY12 net profit forecast by 9.8% to US$788.1m.

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