TACTICAL SWITCH from ASII to ADRO - JP Morgan

A number of factors underpin this tactical switch recommendation by JPM sales desk: (1) MSCI rebalancing that could result in US$50mn plus buying flow in ADRO over the next few days, (2) Scope for short term trend reversal in Rp:USD (although I would highlight JPM global FX view of continued bearishness in USD vs global currencies, report attached), (3) Investors relative positioning in the two stocks, with ASII being well-owned and ADRO less-so, (4) Newsflow – the much increased scope for ADRO to win the 2000MW power project is new news, while we would struggle to identify the positive catalyst for ASII in the near term.

Reduce Astra International (ASII) – Aditya Srinath (analyst) has downgraded rating from O/W to Neutral. The stock has outperformed the JCI by 19% in the past month alone. The price may inadequately reflect two risks that could come back to haunt:

(1) Fuel subsidy cuts: Sales of unsubsidized fuel declined by 26% in March vs. Jan 2011, are down 38% y/y in 1QFY11. This raises the risk that action either to cut subsidies or limit subsidized fuel sales to private cars could come back into the reckoning in the next few months.

(2) Car taxes: We believe that the issue of taxes could also cloud the outlook before year-end and are concerned about the possibility that the Jakarta municipality (50% of Toyota sales) could seek to follow East Java in raising taxes from 10% to 15%, impacting demand.

The stock trades on 15x P/E FY11 based on JPM estimate, or 14.6x based on consensus.

Add Adaro Energi (ADRO) – Its consortium, composed of ADRO 34%, J-Power 35%, and Itochu 32%, becomes the only party that technically qualifies to provide the 2x1000MW power plant in Central Java, worth US$3.0-3.5bn. The three other parties involved in the tender process are consortiums from Marubeni Corp, China Shenhua Energy, and China National Technical Import and Export Corp. PLN’s CEO Mr. Dahlan Iskan expects to finalize the evaluation and announce the official winner by mid-June. The Investor Daily reporter speculates that the ADRO consortium has offered the electricity provision at US$0.06/kwh. My take – the winning should open up significant volume growth opportunities coming from ADRO’s low CV reserves the Wara coal. Prefer this name to the competing LT growth story from PTBA. ADRO guys simply move faster.

The stock trades on 16.7x P/E FY11 based on JPM estimate, or 15.0x based on consensus.