CLSA Adaro Energy – Highlights

We held a luncheon gathering yesterday, with three members of Board of Directors. Key takeaways from the meeting are summarized as follow.

The management was confident on Adaro operating performance this year, targeting to produce 42m to 45m tonnes of thermal coal with 75% of the volume priced already, while stating that production in the first two months of this year has been within budget.

The management also stated that Adaro’s access to financing has thus far been pretty good, better than some we suppose, as the company managed to secure stand by facility, amounting US$40m, at LIBOR plus 200bp, which looks reasonable to us.

There were concerns arising on 1) on the potential related-party acquisition of shipping and logistic company and 2) the lingering uncertainty regarding investment in Recapital.

There was not much detail on the acquisition potential, unfortunately, as due diligence is still on going. The management only explained that 1) the considered value is US$100m, 2) some of the targets are related-party companies, 3) some of them are already shipping coal for Adaro, and 4) Adaro wants to buy an operating company, not just buying ships, barges or floating cranes.

The good thing is the fact that management tried to be open to investors on the potential related party acquisition. However, the fact that this could be a related-party transaction is already a concern for most investors. Valuation and timing is another tricky question here. On valuation, since Adaro is considering buying from related party, we are not sure whether Adaro would be able to acquire this shipping asset cheap, relatively speaking. With freight rates falling off the cliff, we believe there are plenty of distressed shipping assets out there and Adaro might not need to buy this related-party shipping company. Timing is another question here, as we are not sure whether the company really needs to do the action now when capital is scarce.

On short-term investment in Recapital, the management could not provide a clear answer on what type of investment was that and when Adaro could get its money back in full amount. The management stated that the remaining balance has come down to Rp980bn from Rp1,156bn in 9M08. There has been no provision set thus far.