ADRO:No more translation effect - Mandiri

ADRO’s 1Q11 results within industry’s trend (about 20% of FY11F) in light of monsoon season. 1Q11 production accounted for 22.6% our FY11F target of 47Mt. It was a good start and on track with its FY11F target. Logistic improvement has led to despatch of US$103k in March 2011, showing us better improvement and good commitment from the company. E-4000 continued have encouraging demand, with sales of 1.2Mt accounting for 24% FY11F target of 5Mt. We know that ADRO is not cheap stock in industry in term of PER11F, but it looks attractive in term of EV/EBITDA at 6x. The near term catalyst might come from unlocking “Maruwai’s treasure” and closing the 3- 4 coal assets acquisitions to achieve its 80Mt target by 2014. ADRO will no longer face translation effect in its earnings report due to redenomination to USD. We maintain our TP at Rp2,800/share and Buy rating.

1Q11 within industry’s average. ADRO produced and sold about 10.6Mt (-6.7% yoy, +2.3% qoq) in light of monsoon season. ADRO posted 1Q11 net profit of US$109mn (+12.1%yoy,+91.2%qoq) accounted for 19.0% our FY11F. 1Q11’s ASP of US$63.8/ton in line with our estimate, accounting for 91.2% of our FY11F of US$70/ton. In quarterly basis, ADRO posted better margins which operating margin and EBITDA margin have recovered to 29% and 35% from the previous quarter of 21% and 25% respectively.

Higher reserves and resources. ADRO reported higher reserves and resources of 938Mt (+5.5%) and 4,429Mt (+28.6%) based on independent party by Terence Willsteed & Associates in accordance to JORC code. Interestingly, ADRO still used long term coal price FOB Kelanis of US$55/ton or benchmark price of US$75/ton, which means there is still much upside potential for its reserves and resources.

New accounting standard & redenomination. ADRO has redenominated its reporting from IDR to USD currency to minimize forex translation fluctuation and adopted new accounting standard, revised PSAK 22, which goodwill amortization no longer applied. Instead, impairment-like principle based on recoverable amount (revised PSAK 48) will be applied from 2011 onwards. This is positive to its bottom line, reflecting the real cash earnings.

Maintain Buy and TP.. We made minor changes with the associated higher fuel cost resulting 5-6% increase in cash cost, but we maintain our TP at Rp2,800 implying 17.5xPER11F and 13.1xPER12F. Historically ADRO’s stock was firmly traded at premium range of 16x-20x PER. Currently ADRO is traded at 14.8xPER11F. Reiterate Buy.