PT ADARO ENERGY Tbk Performing well in Rainy Seasons - AAA Securities

± Summary
Higher rainfall in mining area did not stop Adaro from increasing its output which has gone up by 4% YOY to 42.2 million, or has achieved 95% of 45 Mt of its last year target. Decline in demurrage charges resulted from better barging time and loading cycle, will help net profit, which fell by 50% last quarter, to bounce back. Long-term contract with MBBS has started to take effect on Adaro’s operational performance. Natural disaster in Australia that has caused global coal price to increase will also benefit Adaro in the long run as ASP will be higher. In term of business development, Adaro is still working on the OPCC and 2 x 30 MW power plant projects. Therefore, we would like to reinitiate with BUY recommendation. Our target price of Rp3,000 is based on blended valuation method, which implies 15.3 X PE and 6.1 EV/ EBITDA, this is in line with its historical average valuation.

± Improved Productivity In The Rainy Season
Even with high rainfall in the mining area in 4Q210, Adaro is still able to increase its output by 4% YOY to 42.2 million Mt, or achieved 95% of 45 Mt of its last year target. Wara mine area was less affected by wet seasons as it is still in the initial stage of development and has a low overburden-stripping ratio. This year Adaro plans to improve its production output to 46 – 48 Mt, including the contribution of Wara – Envirocoal that will contribute 4 – 5 Mt per year. This new product continues to attract Chinese, India, and South Korean buyers.

± Valuation
We still believe that ADARO will perform well for the next coming months, which is due to a number of factors: 1) Adaro’s reputation in achieving its output target year by year, and its flexible business model that allows it to monitor different stages of production, from upstream to downstream. 2) Higher demand for coal that will increase average selling price. 3) Lower freight and handling cost and which will reduce cost by around 15%. These three factors will help increase its net profit. That said, we reinitiating coverage of ADARO with BUY recommendation. Our target price of Rp 3,000 is based on blended valuation method, which implies 15.3 X PE and 6.1 EV/ EBITDA, this is in line with its historical average valuation level. Adaro is currently traded at 12.1X PE and 4.8X EV/EBITDA, providing 28% potential upside from our target price.