Adaro Energy (ADRO), listed in Jul08, provides integrated coal mining services through its subsidiaries, each operating as a strategic business unit. Its coal mining unit, Adaro Indonesia (Adaro) has reserves of 928mn tons and resources of 2,803mn tons and its concession is valid until Oct 2022. Despite slowing global coal demand and softer prices, we expect ADRO to report the largest ever jump in its earnings in FY09 (+ 515.3%yoy). This is because we expect its ASP (average selling price) to increase by at least 50%yoy in FY09F, backed by re-pricing of locked-in prices of 20mn tons of its coal (±50% of production). Besides a strong earnings growth in FY09F, we will like to give a special mention to the special dividend ADRO plans to distribute in early 2009.
Trading cheaply at PER09F of 5.6x. Besides being strong operationally, the company is now better levered, with net gearing down from 11.8x to 0.4x from FY05 to FY08F. Based on DCF (WACC: 16.4%, TG: 0%) we value ADRO at Rp1,200/share (+46.3% upside), implying PER09F of 8.2x.We initiate with a Buy. Additionally, ADRO has invested Rp1.0tn in Recapital, it plans to redeem this in! the near future and intends to have no further investments with Recapital.
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