Adaro Energy Underperformed on higher tax rate - DBS Vickers

At a Glance
FY10 results below estimates due to higher tax rate.
Cut FY11/12F earnings by 14% and 3% for slower output growth
FY11F earnings growth 111%; maintain Buy.

Comment on Results
ADRO’s FY10 net profit fell 49% yoy to Rp2.2tn due to lower ASP (-3%) to US$57.2/ton and higher cash cost (+17%) to US$35.3/ton due to higher stripping ratio (5.5x), longer overburden hauling
distances and additional weather related costs. The weak FY10 earning was in line with the poorer performance of others miners affected by higher 2H production cost. FY10 net earnings
accounted for 92% of our forecast of Rp2.4tn, below our estimates due to higher effective tax rate of 53% versus 48% of our forecast. Results also came in below market consensus by 12%.
Looking ahead, we expect FY11F earnings to grow 111% yoy on the back of 9% volume growth and 20% higher ASP. The company indicates 46-48m tons of FY11F production, including 4-5m tons from Wara. We therefore cut our FY11 output assumption to 47m tons from 48m tons to be more conservative since weather remains the wild card. We also raised our production costs by 3% after imputing higher stripping ratio to 5.9x (from 5.5x) and higher fuel costs. Following the revised assumptions, FY11/12F earnings are reduced by 14%/3%.

Recommendation
Maintain Buy for ADRO on solid production growth backed by its vast reserves. TP lowered to Rp2,850 (from Rp3,100) following the earnings revision based on blended valuation of 17x FY11F PE and 4.5x P/BV.