KI: ADRO - Reinitiation Report - The Gigantic Ship Amidst Storm

ADARO ENERGY - TP: 1,460/sh (HOLD)

The Gigantic Ship Amidst Storm



Volume expected to still rise

We remain skeptical on the government’s plan to keep Indonesia’s coal production to stay flat or even fall by 5% yoy to around 400 mn MT in 14F. Large coal companies are still looking for a production growth this year, including ADRO. The company expects to produce 55.8 mn MT, at its medium to high range of guidance, up by 6.8% yoy. In 1H14, ADRO coal production achieved 27.8 mn MT, rose by 12% yoy from 14 mn MT despite lower stripping ratio. Moreover, we expect additional volume also come from the newly-acquired mine concession, Balangan, at around 300k MT of coal this year.



Debt is still holding the ground

We like the company’s attempt to reduce its debt position, seeing a debt consolidation by preserving more cash and extending loan maturity profiles during the recent coal price turmoil. Our financial model reveals that interest coverage is expected to rise to 6x from 4.6x while net gearing ratio is seen to decline to 0.5x from 0.6x in the previous year. Altman-z score is set to move into a safe zone in FY14 from a grey zone in 13A (3x vs. 2.7x).



Improvement of mining infrastructure to reduce costs

The company has several cost-saving initiatives related to an improvement in its mining infrastructure, which should assist in reducing its cash costs in FY14. After completing the physical construction of the OPCC in 2013, ADRO has topped up US$ 0.6 mn during 1Q14, bringing its total investment to US$ 221.9 mn. The company has also continued to broaden into power generation with the 2nd stage power plant of a 2x30 MW mine that is expected to be accomplished in 4Q14, coupled with an upcoming 2nd stage expansion of Kelanis coal terminal.



Highest EBITDA margin & longest live mine resource

ADRO owns the highest EBITDA margin (30%) among coal miners in the Southern Hemisphere. Reinforced by 12.7 bn MT of resources and 1 bn MT of reserve, ADRO is bracing its position as one of the longest active mine resources among Indonesian coal miners, which resulted from winning four IUP concessions with maturity ranging from 2029-2038.



A storm is still brewing for coal price

We believe coal supply growth by Australia and Indonesia is expected to remain strong in 14F and 15F, which keep flooding the Pacific Basin market. Newcastle 6,000 kcal coal price hit a new low for the last 5 years, down to US$67/MT in July 2014, translating a looming outlook. However, we’re looking at a modest coal price recovery in the late 15F as most of today’s capex for coal miners are falling down.



Valuation

We re-initiated coverage on Adaro Energy (ADRO) with a HOLD recommendation. We value ADRO at Rp 1,460.-/share based on a Discounted Cash Flow Method (DCF). Our TP implies a 15F PER of 10.5x and EV/EBITDA of 5.3x. Based on a share price of Rp. 1375/share, our target price suggest a limited upside potential of 6%.



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