Adaro Energy - Jump! - (ADRO-BUY-IDR2,250-TP:IDR2,950) - Bahana

2011: Earnings to jump 77% y-y
In 2011, Adaro Energy (ADRO) will see net profit up 77% y-y on 24% higher ASP and 10% increased production. We expect 46.5m tons of production (+10.2% y-y), in line with the company’s guidance of 46-48m tons. On pricing, we expect ASP to increase 23.8% y-y to USD70.8/ton, also in line with management’s estimate of USD68.6-71.4/ton. Note that ADRO was rather accurate in providing its 2010 ASP guidance for 2010 of close to USD58.7/ton, some 3% higher than actual ASP achieved of USD57.18/ton. ASP achieved was lower than guided because: 1) as ADRO could not meet the delivery schedule of its customers due to rain, customers pushed higher priced coal for delivery in 2011 (2) rain resulted in higher moisture content of the coal and therefore ADRO got higher discount on the coal to the benchmark price. With blended stripping ratio of 5.9x, we expect EBITDA of USD1.2b, up 38.2% y-y, also in line with ADRO’s guidance of USD1.1-1.3b.

Cost reduction initiatives to lower cash costs by 13-14%
ADRO is taking steps to reduce its cash costs. First, it is installing USD150m Out Pit Overburden Crushing and Conveyor (OPCC), to be operational in 2013 allowing savings of USD1-2 per bcm. At 80m tons production, ADRO will produce about 380mbcm, and assuming USD1.5 savings per bcm translates to total savings of USD570m, some 13% of total production cash costs. Second, Shell has set up a fuel terminal at the Indonesian Bulk Terminal (IBT), ADRO’s terminal for coal stock piling, expected to reduce ADRO’s fuel procurement cost. This should provide savings of USD2-3 cents/liter, implying 3% savings on fuel cost, some 0.42% of total production cash costs. Additionally, other cost reduction initiatives, including bio diesel facilities, will cut oil dependency. To further encourage efficiencies, ADRO has set up agreements with 3 barge-related contractors, allowing for additional tonnages at 15% lower freight cost per ton for ADRO. Thus, we expect cash cost to rise 13.4% y-y to USD46.3/ton, in line with ADRO’s guidance of USD47/ton.

Retain BUY with 3% lower TP of IDR2,950 on slightly lower earnings
Adjusting for 2010 earnings, we cut ADRO’s net profit by 4% in 2011, translating to slightly lower TP of IDR2,950. ADRO plans to report in USD, and we forecast USD440m for its 2011 net income or IDR3.9t, 22% below consensus due to the following: (1) Current consensus earnings assume higher ASP than ours; (2) ADRO may also plan to raise debt by some USD600m, raising interest costs, as it is seriously considering acquiring 3-4 low grade deposits in Indonesia. Additionally, with new deposits acquired, amortization of mining rights will increase going forward, which we have not considered in our forecasts. Over the longer run, ADRO maintains its plan of achieving 80m tons in 2014, and it also plans to invest in 2GW of coal fired power plant projects, which will be heavily debt-financed. While this will add to ADRO’s future revenues, we have not included their impact in our forecasts. With strong earnings growth in 2011, we retain our BUY.