Adaro Energy - Rain and strip ratio hurt 2010 results - Macquarie Research

Event
§ Adaro Energy on Wednesday evening reported FY10 financial results with
reported net profit down 49% YoY to Rp2.2tr from Rp4.4tr in FY09, reflecting
lower coal price and strong appreciation in Rupiah. This is in line with our
expectation, but 14% below consensus forecast. Adjusting for non recurring
expenses (extraordinary demurrage) and amortisation of goodwill, the clean net
profit of Rp3.1tr, was also in line with our expectations.
§ Further, the company also aims to increase its coal production from 42.2mt in
2010 to 46-48mt in 2011, roughly in line with our 47mt expectation. However, the
company also expects the strip ratio to go up from 5.4-5.5x to 5.9x in 2011 to
make up the shortfall in pre-stripping work in 2010 (due to severe rain).

Impact
§ In-line FY10 production, but sales come in ahead... The company produced and
sold about 42.2mt (up 4% YoY) and 43.8mt (up 6% YoY) of coal, vs. our expectation
of 42mt for both production and sales. During 4Q10, the company’s production has
been running at 3.5mt per month (which implies 88-90% of 2011 production).
§ …offsetting lower price and higher cost. The company’s FY10 ASP came in at
US$57.2/t, slightly lower than our expectation of US$57.8/t, mainly due to some
deferred shipment of higher-end priced contracts (given shortfall in production in
2010 due to rain). Production cash cost (ex-royalties and S&GA) also came in
higher than expected at US$30/t vs. our US$29/t forecast due to higher
demurrage and strip ratio (this implies a Q4 production cash cost of US$35.1/t).
§ Increasing 2011 production to 46-48mt from 42.2mt in 2010. This is mainly
driven by the production ramp-up at the lower grade Wara pit, which the company
expects to increase production from 2mt in 2010 to 4-5mt in 2011. We believe
that the company should have sufficient equipment capacity to hit its 2011 target,
given that the 2010 original target was already around 45-46mt (and only to be
downgraded to 42-43mt due to rain condition).
§ See 15-20% potential downside risk to earnings, mainly due to lower coal
pricing and higher cost. Thus, we see possible downside risk to our JFY11 coal
price forecast of US$145/t toward US$120-130/t, due to short-term pressure to
coal price (post disaster in Japan). Further, higher oil price also present downside
risk to Adaro’s earnings as it represents 25-30% of production cost.

Earnings and target price revision
§ No change.

Price catalyst
§ 12-month price target: Rp3,250 based on a PER methodology.
§ Catalyst: Increasing coal price, commencement of Maruwai project.

Action and recommendation
§ We rate Adaro Energy Outperform. However, we acknowledge that we see 15-
20% potential downside to our 2011 earnings forecast, as we see downside risk
to our US$145/t JFY11 settlement toward US$120-130/t. On this scenario, we
think the stock could trade on 12-13x 2011E PER.