ADRO (TP Rp2,475) : Decent 1Q results; recommend buying on any weakness - BoA Merrill Lynch

Not a bad 1Q to start off 2011, in our view
ADRO’s 1Q NP came in at US$108mn, up 12% YoY and 80% QoQ, reaching 22% of our FY est. Revenue was US$757mn, up 12% YoY and 3% QoQ, 22% of our FY est. EBIT was flat YoY and up 44% QoQ, at US$219mn, 20% of our FY est. We think 1Q numbers were quite decent. Starting 2011, ADRO has changed its financial reporting to US$ from IDR. Asides from changing our financials to USD from IDR, we largely maintain our ests and PO unchanged at Rp2,475.

Volume, ASP, cost within expectation
1Q volume was 10.9mn t, down 5% YoY and QoQ, reaching 24% of our FY est. The decline was not a concern, in our view, considering it was attributed to restripping work in 2009 and higher sales volume from Coaltrade in 4Q10 – ADRO
still expects to meet its 46-48mn t full-year sales target. ASP came in at US$63.8/t, up 16% YoY, and 8% QoQ. With recent coal price settlements done as high as US$87/t, we believe our full-year estimate of US$69/t is achievable. Cost came in at US$41/t, up 21% YoY, flat QoQ, on higher S/R albeit lower freight./demurrage cost, but this was all factored into our FY estimate of US$42.7.

Balance sheet not an issue
Current net debt to EBITDA stands at 1.0, vs the maximum of 3.5 set by the existing debt covenant. Meanwhile, debt service coverage, we calculate, was 3.2, vs the minimum of 1.2 at debt covenant. Assuming ADRO requires further cash for expansion, we estimate it can raise another US$2.5bn in loan (it should have US$420mn of standby facility by end-2011).

Maintain Buy rating; our fourth pick in the sector
While we expect near-term downside risk to the coal price, we are bullish on coal
price for the medium to long term. If there is any share-price correction, we would expect the stock to recover slower than its peers, as it is more liquid, with more volume growth already priced in. However, being the largest and most liquid coal
company, Adaro should be the preferred Indonesian coal play for some investors.
We reiterate our Buy rating and recommend buying on any weakness.