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Danareksa Equity Snapshot - ADRO, 15 Maret 2019
March 15, 2019 11:00

Adaro Energy(ADRO IJ)

Recovery in store

 

We expect the improvement in low-CV coal prices since the beginning of the year to help Adaro Energy (ADRO) book solid coal ASP in 1H19 despite expected consolidation in coal prices in 2019. In addition, we also expect the company to book higher earnings as Kestrel will provide higher saleable coal production. Maintain BUY with an unchanged target price of IDR2,000 (based on DCF valuation).

 

Solid ASP in 1H19 thanks to recovery in the low CV coal price.  Although we expect consolidation in coal prices in 2019, we believe the recent improvement in the low CV coal price for 4,200 kcal/kg GAR and 5,000 kcal/kg GAR (+23 - 32% ytd) will help the company to maintain solid ASP in 1H19. Nonetheless, we maintain our ASP price assumption for ADRO in 2019.

 

Flattish cash cost of production amid a lower stripping ratio for 2019.  While the stripping ratio is expected to decline to 4.6x in 2019 from 5.1x in 2018, the management indicates a similar cash cost of production from thermal coal in 2019 compared to 2018 at USD29/ton as the company expects higher fuel costs. To reduce volatility in fuel costs, the management indicates that it will hedge about 20% of its 2019 fuel requirement.

 

Expect sturdy earnings in 2019 supported by the Kestrel acquisition.  We expect solid earnings for ADRO in 2019 following the acquisition of Kestrel in Aug 2018 owing to: a) the management’s indication of 40% yoy higher saleable coal production of around 6.7mn tons from Kestrel in 2019 from 4.8mn tons in 2018 as a result of efficiency improvements which will boost the earnings of Kestrel this year and b) the absence of one-time non-operational transaction and transition costs for the acquisition that were booked in 2018. Going forward, the management has indicated that coal production from Kestrel will improve further to 10mn tons in the next three years.

 

Maintain BUY with an unchanged target price of IDR2,000 (based on DCF valuation with WACC of 10.2%). We continue to like the company since the recent improvement in the low CV coal price should help to sustain ASP in 1H19 and because the medium to long-term earnings may be enhanced by business diversification beyond thermal coal (in coking coal and power plants). Our target price implies 10.3x 2019F PE.

 

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