Adaro Energy - Incorporating J.P. Morgan's new coal price assumptions - JP Morgan

We incorporate J.P. Morgan’s higher medium coal price forecasts; maintain Neutral rating and PT of Rp2,400: We incorporate J.P. Morgan global coal team’s revised FY12 and FY13 coal price assumptions of US$128 and US$129 per ton vs. US$125 and US$118 per ton earlier, respectively. As the FY11 coal price estimate remains
unchanged, there is no change to our FY11 forecast, but FY12/FY13 net income forecasts have been hiked by 4%/18%. As J.P. Morgan’s longterm coal price forecast remains unchanged at US$95/ton, our DCF based Jun-12 price target of Rp2,400 remains unchanged even after our estimate revisions. We maintain our Neutral rating.

Risk to volume: We believe there is downside risk to ADRO’s FY11 volume guidance of 46-48 million tons due to the trailing run rate of coal production. Historically, there have been instances of Adaro missing its production volume targets.

Our FY13 net income forecast is slightly below consensus: Our FY12 net income forecast of US$738 million is in line (-2%) with consensus, while our FY13E estimate of US$839 million is 7% below. We attribute the difference to our high cost assumption for Adaro.

High valuation; sell into strength: At 18.5x FY11E P/E and 13x FY12E P/E, ADRO is the most expensive coal name in J.P. Morgan Indonesia’s coverage universe on our estimates vs. the industry FY11E average P/E range of 10-15x. With the recent appreciation in the share price, we recommend to sell into strength.