CLSA ADRO TP idr925

Research Today: Adaro (ADRO IJ), initiating coverage, OPF, TP Rp925

Our analyst Olie initiates coverage on Adaro Energy (ADRO IJ) with an Outperform call and TP of Rp925.

INTERESTING ALTERNATIVE …

From scale and profit growth perspective, ADRO is an interesting alternative in the coal sector. This is the second biggest coal producer (38mn tonnes on 2008, 17% of total Indonesian production) in Indonesia, with 3rd biggest reserves in Indonesia to support future growth (928m tonnes).
Net profit could jump five-fold, driven largely by re-pricing of long-term fixed contracts, lower costs, and steady production growth.
Out of 20mn tonnes already contracted in 2009, ADRO has successfully re-negotiated some of these contracts (16mn out of 20mn).

BUT NOT A DEFENSIVE PLAY ….

However, this is not a defensive play (we prefer ITMG and PTBA for defensive names).
Total debt is about US$930mn, net gearing 52% in 2008, not appealing when peers are in net cash.
Mining cost is cheap but neutralized by expensive transportation costs. Transportation is 75km by road and 250-350km by barging.
Management has been successful in growing productions and marketing envirocoal (very low ash and almost non-existent sulfur). However, we question ADRO’s strategy for asset-heavy-full-integration business model.
The performance of the company’s own mining contractor has been poor.
Some of the recent acquisitions are expensive, in our view.
Rp1.1tn investment in Recapital (no loss provision made so far) is another question mark.
Shares overhang. Lock-up for financial investors, control around 25% stakes, will end in mid March 2009.