1. business and industrial
2. energy
3. coal

Friday, 17 April 2015
MINING/ COMPANY UPDATE
BUY
Adaro Energy
Target Price, IDR
1,150
Upside
19.2%
ADRO IJ/ADRO.JK
Overcoming the challenges
Although the outlook for the coal sector remains lackluster due to persistent
oversupply of coal globally coupled with muted coal demand (particularly from
China), we still believe that Adaro Energy (ADRO) is well-placed to face these
challenges head on. Our confidence is grounded in: a) further cost efficiencies in
30,866
lowering the stripping ratio and a slump in crude oil prices which will cushion
2,402
against further margins erosion, b) strengthening of the balance sheet, and c)
3.0
progress on its power plant project which will provide additional earnings over the
medium-term. As we incorporate the latest financial figures, we trim our Target Price
IDR 1,280 to Rp1,150 based on DCF valuation with a WACC of 9.9%. BUY maintained.
Last Price, IDR
No. of shares (mn)
965
31,986
Market Cap,IDR bn
(US$ mn)
3M T/O, US$mn
Last Recommendation
11-Mar-2015
11-Feb-2015
08-Jan 2015
BUY
BUY
BUY
IDR 1,280
IDR 1,280
ADRO relative to JCI Index
ADRO (LHS)
Relative to JCI Index (RHS)
%
IDR
1,500
35
25
1,350
Coal production expected to be maintained or raised slightly
The company managed to increase coal production by 8% yoy to 56.2mn tons in 2014 supported
by its current mining area under Adaro Indonesia and the commercial production at Balangan Coal
in 2Q14. For 2015, subject to government approval, the company is expected to maintain or slightly
increase its coal production to about 56 – 58mn tons with the stripping ratio expected to decline
to 5.33x in 2015. (2014: 5.7x).
15
1,200
5
1,050
-5
4/16/15
3/19/15
2/19/15
1/22/15
12/25/14
11/27/14
10/30/14
9/4/14
10/2/14
8/7/14
7/10/14
6/12/14
5/15/14
-15
4/17/14
900
Market Recommendation
10
BUY
15
HOLD
SELL
1
Danareksa vs Consensus
Target price, IDR
EPS 2015F, IDR
PE 2015F, x
Our
1,150
66
14.7
Cons
1,098
83
11.6
Stefanus Darmagiri
(62-21) 2955 5777 ext.3530
[email protected]
Danareksa research reports are also
available at Reuters Multex and First Call
Direct and Bloomberg.
www.danareksa.com
% Diff
4.7
-20.5
26.7
Continued cost efficiencies to avert further margins erosion
Despite the higher stripping ratio in 2014, the company managed to lower its cash costs by 5%
yoy to US$33.03/ton. This owed to the implementation of cost efficiency initiatives supported by
lower fuel costs and a decline in freight and handling costs. With the currently depressed coal
prices, such cost efficiency initiatives will be continued in an effort to cushion against further
margins erosion marked by: a) a lower stripping ratio and b) the recent slump in crude oil prices
which, in turn, will lead to lower fuel costs.Hence, we expect the cash costs to drop further to just
US$31.6/ton in 2015, in line with the company’s guidance of US$31 – 33/ton.
Strengthening the balance sheet by lowering the gearing
Following early redemption of US$800mn of 10-year senior notes issued in 2009 in 4Q14 and the
repayment of US$421mn of loans extended in 2011 in 3Q14 through refinancing provided by a
new US$1bn loan facility and from internal cash, the company’s gearing declined to 35% in 2014
from 49% in 2013. We expect the gearing to drop further to only 12% in 2017. With a stronger
balance sheet, the company will ultimately have greater flexibility to obtain further financing
whilst the profitability will also get a boost thanks to lower interest expenses.
Making progress on its downstream business diversification in power plants
After Bhimasena Power Indonesia (BPI), a 34% owned company subsidiary, declared force majeure
on its 2x1,000 MW power plant project in Batang, Central Java in mid-2014 due to land acquisition
problems, the management has encouragingly stated that significant progress has now been
made in this regard with land acquisition nearly completed. When this power plant starts to
operate, it will provide additional earnings for ADRO over the medium-term.
Revenue, USD mn
EBITDA, USD mn
EBITDA Growth, %
Net profit, USD mn
EPS, USD
EPS growth, %
BVPS, USD
DPS, USD
Net Gearing, %
PER, x
PBV, x
EV/EBITDA, x
Yield, %
2013
2014
2015F
2016F
2017F
3,285
822
-27.7
234
0.007
-39.3
0.084
0.002
49
12.9
1.0
5.8
2.5
3,325
877
6.7
178
0.006
-23.9
0.086
0.002
35
15.0
1.0
4.3
2.8
3,011
685
-21.9
168
0.005
-5.9
0.089
0.003
28
14.7
0.9
5.0
4.0
3,169
729
6.5
184
0.006
9.5
0.092
0.003
20
14.0
0.9
4.5
3.6
3,387
774
6.1
204
0.006
11.4
0.095
0.003
12
13.1
0.9
4.0
3.8
See important disclosure on the back of this report
17 April 2015
Adaro Energy
Coal production expected to be maintained or raised slightly.
The company managed to increase coal production by 8% yoy to 56.2mn tons in 2014
supported by its current mining area under Adaro Indonesia and the commercial production
at Balangan Coal in 2Q14. The higher coal production is reflected in the higher coal sales
volume which climbed 7% yoy to 57.0mn tons. Overall, about 22% of the total sales were
made to the domestic market with the remaining 78% exported, with India, Japan and China
the company’s three largest markets.
For 2015, subject to government approval, the company is expected to maintain or slightly
increase its coal production to about 56 – 58mn tons with the stripping ratio expected to
decline from 5.7x in 2014 to 5.33x in 2015 – or at par with the average stripping ratio over
the life of the mine. Meanwhile, about 60 – 70% of the coal sales volume for 2015 will be
priced based on fixed prices with the remaining 30 – 40% based on indexed prices.
Exhibit 2. India was ADRO’s largest export market for 2014
Exhibit 1. Quarterly coal sales volume and ASP
mn tons
Sales Vol (LHS)
ASP (RHS)
17
Others
10%
US$/ton
80
Malaysia
6%
Indonesia
22%
15
70
13
11
60
9
Hong Kong
9%
Spain
7%
India
15%
50
7
Korea
9%
5
China
10%
40
1Q12
3Q12
1Q13
3Q13
Source: Company, Danareksa Sekuritas
1Q14
3Q14
Japan
12%
Source: Company
Continued cost efficiencies to avert further margins erosion
Despite the higher stripping ratio in 2014, the company managed to lower its cash costs
by 5% yoy to US$33.03/ton. This owed to the implementation of cost efficiency initiatives
supported by lower fuel costs and a decline in freight and handling costs. With the currently
depressed coal prices, such cost efficiency initiatives will be continued in an effort to cushion
against further margins erosion marked by: a) a lower stripping ratio and b) the recent slump
in crude oil prices which, in turn, will lead to lower fuel costs. Hence, we expect the cash costs
to drop further to just US$31.6/ton in 2015, in line with the company’s guidance of US$31
– 33/ton.
2
17 April 2015
Adaro Energy
Exhibit 4. Cash cost still below the target of US$35 – 38/ton
Exhibit 3. Stable coal production
Production (LHS)
Stripping Ratio (RHS)
US$/ton
45
mn tons
15
x
10
14
9
40
8
35
13
12
7
11
30
6
10
5
9
4
8
1Q12
3Q12
1Q13
3Q13
1Q14
25
20
1Q12
3Q14
3Q12
1Q13
3Q13
1Q14
3Q14
Source: Company
Source: Company
Lower crude oil prices to help sustain margins amidstweak coal prices
We expect the company to avert further margins erosion following the recent slump in crude
oil prices. Notably, diesel prices have sunk to around US$0.50 – 0.60/liter from US$0.79 – 0.80/
liter in 2014, a significant development since fuel accounts for about 25 – 30% of the
company’s total COGS. The company has only hedged about 30% of its total diesel
requirement for 2015 compared to an 80% average over the past three years. In our sensitivity
analysis, it can be seen that for every 10% decline in crude oil prices from our assumption,
ADRO’s earnings would increase by 16.1% and 15.3% in 2015 and 2016, respectively.
Exhibit 5. Maintain current production volume
mn tons
Tutupan
Paringin
Wara
Balangan Coal
Total Production
70
60
50
40
30
20
10
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Source: Company, Danareksa Sekuritas
1Q15 preview: lower coal prices to drag down net profits
We expect the company to book lower net profits in 1Q15, owing to: a) a 20% yoy decline
in the coal price in 1Q15, and b) expectations of a higher stripping ratio which will increase
cash costs (ex royalty). The company booked a lower stripping ratio of 4.9x in 1Q14 compared
to 2015 guidance of 5.33x. As a result, the cash cost was only US$29.9/ton in 1Q14 vs. guidance
of US$31 – 33/ton for 2015. However, the slump in crude oil prices - which is reflected in diesel
prices of only around US$0.50 – 0.60/liter – may help mitigate a further decline in net profits
in 1Q15.
3
17 April 2015
Adaro Energy
Strengthening the balance sheet by lowering the gearing
Following early redemption of US$800mn of 10-year senior notes issued in 2009 in 4Q14
and the repayment of US$421mn of loans extended in 2011 in 3Q14 through refinancing
provided by a new US$1bn loan facility and from internal cash, the company’s gearing
declined to 35% in 2014 from 49% in 2013. Assuming the company repays its loan on
schedule and with no additional loans disbursement, then we expect the gearing to trend
down to 12% in 2017. With a stronger balance sheet, the company will ultimately have
greater flexibility to obtain further financing whilst the profitability will also get a boost
thanks to lower interest expenses. The management indicated interest expense savings of
around US$15mn following the recent refinancing.
Exhibit 6. Expecting gearing to trend down
Cash (LHS)
US$ mn
Debt (LHS)
Net Gearing (RHS)
3,000
70%
2,500
60%
50%
2,000
40%
1,500
30%
1,000
20%
500
10%
0
0%
2010
2011
2012
2013
2014
2015F
2016F
Source: Company, Danareksa Sekuritas
Making progress on its power plant project
After Bhimasena Power Indonesia (BPI), a 34% owned company subsidiary, declared force
majeure on its 2x1,000 MW power plant project in Batang, Central Java in mid-2014 due to
land acquisition problems, the management has encouragingly stated that significant
progress has now been made in this regard with land acquisition nearly completed.
When this power plant starts to operate following its completed construction in about 4
– 5 years time, it will require around 7.5mn tons of coal per annum, of which ADRO will supply
around 5mn tons of coal from its mining area with the remaining 2.5mn tons coming from
third parties. Hence, through business diversification from the power plant, there will be
an additional earnings contribution for ADRO over the medium to long-term.
Global coal oversupply to persist
Despite the recent news that Indonesia’s coal production had declined by 21% yoy to 97mn
tons in 1Q15 as several coalminers opted to cut production amidst weak coal prices in
addition to unfavorable weather conditions in the mining area, we expect the global coal
oversupply to persist. While the Indonesian Coal Mining Association (ICMA) has called on
the government to cut the coal production target in 2015, the Government of Indonesia
actually seeks an increase in coal production in 2015 from 421mn tons in 2014 with the aim
of increasing the country’s non-tax state revenues.
4
17 April 2015
Adaro Energy
Exhibit 7. Coal Prices
US$/ton
150
130
110
90
70
50
30
Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15
Source: Bloomberg, Danareksa Sekuritas
Maintain BUY
Although the outlook for the coal sector remains rather gloomy, we still like Adaro Energy
(ADRO) for several reasons: a) further cost efficiencies in lowering the stripping ratio and a
slump in crude oil prices which will cushion against further margins erosion, b) strengthening
of the balance sheet, and c) progress on its power plant project which will provide additional
earnings over the medium-term. The weak coal prices are reflected in the stock’s valuation
with the shares currently trading at below -1SD forward PE. At current levels, the stock offers
19.2% upside to our new Target Price of Rp1,150 (based on DCF valuation with a WACC of
9.9%). Our Target Price implies 17.6x 2015F PE. Maintain BUY.
Exhibit 8. PE Band
x
30
25
2sd
20
1sd
mean
15
-1sd
-2sd
10
5
Jan 10
Sep 10
Mei 11
Jan 12
Sep 12
Mei 13
Jan 14
Sep 14
Source: Bloomberg, Danareksa Sekuritas
5
17 April 2015
Adaro Energy
Exhibit 9. Changes in our forecast
Coal sales volume, mn tons
Coal production volume, mn tons
Coal Price, USD/ton
Blended Coal ASP, USD/ton
Cash Cost, USD/ton
USD/IDR Assumption
2015F
New
2016F
58
58
65
47
31
12,500
60
60
68
47
32
12,000
58
58
70
53
33
11,873
60
60
73
53
34
11,500
-0.9
-0.9
-7.1
-10.1
-5.9
5.3
0.0
0.0
-6.8
-10.1
-6.1
4.3
3,011
685
168
3,169
729
184
3,358
839
240
3,508
881
254
-10.3
-18.4
-30.3
-9.7
-17.2
-27.6
Revenue (USD mn)
EBITDA (USD mn)
Net Profit (USD mn)
Previous
2015F
2016F
Change (%)
2015F
2016F
Source: Company, Danareksa Sekuritas
6
17 April 2015
Adaro Energy
Exhibit 10.Profit and Loss, USDmn
2013
2014
2015F
2016F
2017F
3,285
(2,541)
744
(173)
571
(147)
424
(192)
2
234
3,325
(2,605)
720
(160)
560
(235)
325
(142)
(5)
178
3,011
(2,508)
503
(157)
347
(49)
297
(130)
0
168
3,169
(2,637)
532
(162)
371
(45)
325
(142)
0
184
3,387
(2,825)
562
(167)
394
(32)
362
(158)
0
204
2013
2014
2015F
2016F
2017F
Cash
Account Receivables
Inventories
Other current assets
Total current assets
Fixed assets
Other noncurrent assets
Total non current assets
Total assets
681
310
103
278
1,371
1,706
3,619
5,325
6,696
745
286
97
144
1,272
1,617
3,525
5,142
6,414
746
269
96
144
1,256
1,575
3,429
5,004
6,259
833
284
101
144
1,361
1,513
3,332
4,845
6,206
906
303
108
144
1,461
1,430
3,236
4,666
6,127
Account payable
Short term debt
Other current liabilities
Total current liabilities
Long term debt
Other non current liabiltieis
Total non current liabilites
327
0
447
774
2,033
715
2,748
351
0
423
775
1,688
693
2,381
326
0
424
750
1,487
694
2,181
343
0
470
813
1,280
694
1,974
368
0
533
900
1,010
694
1,704
Minority Interest
Share capital
Excess paid in
Retained earnings & others
Total equity
Total equity & liabilities
490
343
1,154
1,187
3,174
6,696
492
343
1,154
1,269
3,258
6,414
492
343
1,154
1,339
3,328
6,259
492
343
1,154
1,430
3,419
6,206
492
343
1,154
1,533
3,523
6,127
Turnover
COGS
Gross profit
Operating expenses
Operating profit
Other income/expenses
Pre-tax profit
Taxes
Minority interest
Net profit
Source: Company, Danareksa Sekuritas
Exhibit 11. Balance Sheet, USDmn
Source: Company, Danareksa Sekuritas
7
17 April 2015
Adaro Energy
Exhibit 12.Cash Flow, USDmn
2013
2014
2015F
2016F
2017F
234
324
211
(47)
722
178
394
160
(139)
592
168
338
(8)
0
498
184
359
(2)
0
540
204
379
(2)
0
581
Capex
Others
Investing cash flow
(180)
(3)
(184)
(103)
77
(26)
(200)
0
(200)
(200)
0
(200)
(200)
0
(200)
Dividends
Net change in debt
Others
Financing cash flow
(75)
(265)
9
(332)
(75)
(411)
(10)
(496)
(98)
(239)
40
(297)
(92)
(161)
0
(253)
(101)
(207)
0
(308)
207
500
(26)
681
70
681
(5)
745
1
745
0
746
87
746
0
833
73
833
0
906
2013
2014
2015F
2016F
2017F
22.7
17.4
25.0
7.1
3.5
8.9
48.5
21.7
16.8
26.4
5.4
2.7
6.5
34.8
16.7
11.5
22.7
5.6
2.6
6.0
28.1
16.8
11.7
23.0
5.8
2.9
6.4
20.1
16.6
11.6
22.8
6.0
3.3
6.9
11.5
Net profit
Depreciation and amortisation
Change in working capital
Others
Operating cash flow
Net change in cash
Net cash (debt) at beg.
Forex adjustments
Net cash (debt) at end.
Source: Company, Danareksa Sekuritas
Exhibit 13.Key Ratios
Gross margin, %
Operating margin, %
EBITDA margin, %
Net margin, %
ROA, %
ROE, %
Net gearing, %
Source: Company, Danareksa Sekuritas
8
17 April 2015
Adaro Energy
DISCLAIMER
The information contained in this report has been taken from sources which we deem reliable. However, none of P.T. Danareksa Sekuritas and/or its affiliated companies and/or
their respective employees and/or agents makes any representation or warranty (express or implied) or accepts any responsibility or liability as to, or in relation to, the accuracy or
completeness of the information and opinions contained in this report or as to any information contained in this report or any other such information or opinions remaining
unchanged after the issue thereof.
We expressly disclaim any responsibility or liability (express or implied) of P.T. Danareksa Sekuritas, its affiliated companies and their respective employees and agents whatsoever
and howsoever arising (including, without limitation for any claims, proceedings, action , suits, losses, expenses, damages or costs) which may be brought against or suffered by
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employees or agents accepts liability for any errors, omissions or mis-statements, negligent or otherwise, in the report and any liability in respect of the report or any inaccuracy
therein or omission therefrom which might otherwise arise is hereby expresses disclaimed.
The information contained in this report is not be taken as any recommendation made by P.T. Danareksa Sekuritas or any other person to enter into any agreement with regard to
any investment mentioned in this document. This report is prepared for general circulation. It does not have regards to the specific person who may receive this report. In
considering any investments you should make your own independent assessment and seek your own professional financial and legal advice.
9