Thursday, December 15, 2011

Adaro Energy - Set to Growth

by Trimegah Securities

ADRO managed to hit its highest quarterly production in 3Q11 by producing 12.5mn tons of coal on the back of normal dry weather and arrival of new and larger sized heavy equipments. As such, we are comfortable to maintain our assumption on 2011-2013 coal production at 47mn tons, 51.7mn tons, and 58.7mn tons, respectively. Envirocoal Wara sales also encouraging, with sales volume reached 4.1mn tons in 9M11, already representing 81.4% of our 2011 forecast. We foresee Wara’s sales volume to double next year, to reach 10.3mn tons in 2012.

Aggressive Acquisition to Meet MT Growth

In 2011, ADRO has conducted several acquisitions in order to meet its target to reach 80mn tons production in medium term. USD283.5mn and Rp200bn has been disbursed so far to enter the South Sumatra’s coal business by acquiring 75% stake in Mustika Indah Permai (MIP), 61.04% in Bukit Enim Energi (BEE), and 35% in Servo Meda Sejahtera (SMS). ADRO also made USD65.4mn investment on 10.2% interest in Bhakti Energi Persada. The SMS acquisition should address the market concern on ADRO’s ability to monetize its green field assets in South Sumatra because SMS provides an integrated coal logistic service in the region and owns 228km hauling road from Lahat to Tanjung Lago. On the flip side, we also highlighted the ongoing concession dispute with PTBA will provide negative sentiment in the near term.

Infrastructures Development Continued, More Efficiency to Come

OPCC development is still on track to meet its first commercial operation in 1Q13. Until 9M11, the physical construction progress already reached 28% of completion. OPCC is expected to reduce USD1.0-1.2/bcm compared to the existing use of trucking or USD34mn-40.8mn. The 2x30 MW mine mouth power plant also already reached 77% of completion and on track to meet the expectation of commercial operation in 1Q12. Kelanis river terminal expansion project to 70mn tons also progressing well and will become one of the supporting factors for ADRO to meet its MT growth. ADRO’s consortium on Pemalang Power Plant project also managed to sign a power purchase agreement with PLN in 3Q11.

Maintain BUY, Lower TP of Rp2,700

We maintain our BUY call on the counter on the back of company’s growth potential through its existing mine expansion and several acquisitions. ADRO has been proven for its ability to maintain the production growth despite of any economic fluctuation since its first commercial operation in 1992. We maintain our assumption on coal production while lowering the 2012-2013 ASP to reflect our new coal price assumption. As a result, FY12-FY13 EPS declined by 9.1% and 13.2%, respectively. It brings us to our new target price of Rp2,700, implying 13.2x 2012est PE ratio.

Key Risks: The continuation of MIP’s concession dispute with PTBA will create a negative sentiment to the market and drag the share price, delay in ADRO’s green-field development, which will impact on ADRO’s ability to meet its MT target, potential of the export ban on low rank coal, and the fluctuation on global coal prices.

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