Adaro Energy (Buy, PT Rp3,000, 15% upside) - UBS

We revise Adaro’s earnings by -3% to 25% for 2011-13E, and maintain our Buy rating on the stock based on our 12-month PE target multiple of 14.2x.
􀁑 Average selling price increase. We raise our ASP assumption 5% to 11% in 2012-13 in line with our higher benchmark price forecast. Adaro has priced 65% of its 2011 volume YTD, while the remainder is based on un-priced index-linked contracts and spot sales.
􀁑 Volume adjustment. We make a slight downward adjustment to Adaro’s production in 2011-13, which we attribute to challenges pertaining to land acquisition for overburden usage, conveyor belt construction time and general infrastructure bottlenecks. The company produced 10.6mt in Q111 (24% of our new estimate), while we believe Q2 production will be similar. Our new production estimate is down 4-7% to 45mt/50mt/56mt in 2011/12/13.
􀁑 Goodwill. As Indonesian GAAP financial reporting standards move closer towards IFRS, we take note that Adaro no longer amortises goodwill, similar to Bumi Resources. We have removed goodwill amortisation from our earnings estimates and expect Adaro to make a one-off large non-cash writedown in the future.
􀁑 Raising taxes. We raise our corporate tax estimate from the contractual 45% to 50% in 2011 (in line with Q111 results), but continuously assume 45% from 2012 onwards.

We base our price target on a 12-month target PE valuation of 14.2x, which incorporates a 7.6% risk-free rate, 1.0x beta and a 12.8% cost of equity. Our previous 13.9x target PE was based on a 7.6% risk-free rate, 1.1x beta and 12.9% cost of equity. Adaro Energy is currently trading in the mid-to-upper range of its historical PE and EV/EBITDA band.