by Bahana : ADRO
Adaro Energy (ADRO-REDUCE-IDR1,410-TP:IDR1,120)
Lower volumes + higher cash costs = earnings downgrades
§ Lower sales volumes on weaker global coal demand: With continued worsening global economic condition, demand for thermal coal, despite its defensive nature (mainly used to generate electricity), will remain weak through 2013. ADRO, Indonesia’s second largest coal exporter, will not be immune to this global growth deceleration. Hence, we cut our 2012-14 sales volumes by 5%-8% from 53.6m-58.6m tons to 49.5-56m tons (exhibit 5). We note in 1H12, ADRO booked flat output of 23m tons (+0.9% y-y), while sales reached 23.7m tons (-1.4% y-y).
§ Higher than expected cash cost: On the cost side, ADRO booked higher than expected 1H12 cash cost (excluding royalty) of USD38/ton (+10% y-y), compared to our unrevised full-year 2012 estimate of USD34/ton as we had expected ADRO to book lower stripping ratio of 6.3x (1H12: 6.4x).
§ 2H12 pricing to be weaker relative to 1H12 level: While ADRO managed to book higher-than-expected 1H12 ASP of USD75/ton, partially due to ADRO’s policy not to sell its coal at a discount, we still expect the company’s 2H coal pricing to trend down (2H12 ASP: USD68.6/ton) relative to 1H’s level. Hence, we now assume 2012-14 ASP of USD72-USD58/ton (exhibit 5), higher than our previous assumptions of USD66-54/ton, based on a scenario with stronger volume assumptions.
Outlook: Earnings deceleration in 2H12
We expect ADRO’s 2H12 earnings to slow to USD236m (1H12: USD260m) with this difficult operating environment to remain through 2013 on low coal price condition in the next 12 months (exhibit 1). Overall, we have respectively revised down our 2012-14 earnings by 2-5% to USD496m-USD351m (exhibit 5) mainly on lower sales volumes and higher cash costs.
Recommendation & Valuation: Reiterate REDUCE on 21% downside
Despite our earnings revisions, we maintain our DCF-based TP at IDR1,120 as we roll over our valuation into 2013. We reiterate our negative view on ADRO given 21% downside potential to our TP while its 2013 target PE of 10.6x is not cheap at 3% premium to the coal sector (2013 target PE: 10.3x). Thus, we expect ADRO’s 33% ytd underperformance (exhibit 4) to persist. REDUCE.