PT Adaro Energy Tbk (ADRO) - A record production with upbeat
Bareksa • 19 May 2014
File aerial view photo of Adaro Energy's Tutupan coal mine near Banjarmasin in Indonesia's South Kalimantan province (REUTERS/Matthew Bigg)
We reiterate Buy on ADRO with higher TP Rp1,450, based on 13.4x 2014F P/E (unchanged)
Bareksa.com - A record production volume with earnings beating expectations in 1Q. Production volume has reached a record of 14mt (+3% QoQ, +23% YoY) in 1Q. ASP increased +3% QoQ, yet declined –7% YoY, in line with continued weakness in coal price index. 1Q revenue increased to US$845m (-1%QoQ, +14% YoY), in line with our expectation. 1Q earnings came in strongly at US$128m (+170% QoQ, +348% YoY), represent 47% of ours and 59% of consensus estimates.
Lower strip ratio and cash cost uplifting gross margin. Strip ratio (SR) decreased to 4.88x (–8% QoQ, –11% YoY), way below the guidance of 5.78x. Cash cash (ex-royalty) declined sharply to US$29.8/t (-15% QoQ, -24% YoY), uplifting 1Q gross margin to 29%, vs. 22.5% in FY13. ADRO also booked other income of US$30.6m in 1Q, including once-off gain from sales of interest in associates (US$11.4m) and forex gain (US$11.2m). Net margin expanded to 15.2% in 1Q, vs. 7.0% in FY13.
Earnings upgrade for 2014-15F. We have lowered our cash cost assumption to US$34.2 to US$34.7/t (-5%) to reflect lower than expected cash cost. Yet, we believe that SR is likely to normalize during subsequent quarters to ~5.5x for FY14. We have tweaked ASP assumption (–1.9%) to reflect weak coal price. Our 2014-15F earnings have increased 12.4% and 7.4%, represent 125% and 129% of consensus.
Undemanding valuation - BUY. We reiterate Buy on ADRO with higher TP Rp1,450 (+12% from previous), based on 13.4x 2014F P/E (unchanged). ADRO remains our Top pick for coal sector due to: 1) Proven operational performance suggesting better earnings reliability 2) A defensive play at lower coal price environment, due to lower cash cost and sizeable coal sales volume. Any cost saving has a significant positive impact to the bottom-line 3) Undemanding valuation. The stock currently trades at 11.5x P/E, which is -0.7 SD below 3-yr mean of 12-M fwd P/E (14.7x).
*Franky Kumendong is equity analyst of PT Buana Capital. This article is part of the Equity Research of PT Buana Capital