CLSA Adaro Energy (ADRO IJ): good results, but

Adaro Energy (ADRO IJ): good results, but …., from Olie

Given risks associated with BUMI, there is search for a coal stock that is both big and liquid enough. ADRO, Indo’s second largest coal company by production vol, is a natural choice. Liquidity should improve post divestment of stocks by the financial investors, who control 25% stakes in the company and whose lock up period expired in mid March.

ADRO posted strong FY08 results, profit up 10 folds. But, the recent plan to acquire related-party raised a CG issue. Valuation, unfortunately, is not compelling. Stock is at 20% premium (PE and EV/EBITDA) to domestic peers. Maintain UPF rating and TP of Rp750.

Key points from the report:
ADRO posted strong FY08 results, with profit up by ten folds to Rp887bn driven by better than expected coal ASP and volumes.
We keep our forecast for 2009. Adaro starts this year with lower inventory level hence little upside surprise on volume while the company has also contracted 75% of volume this year, which is good, but also suggest there is minimal upside. Impact from coal trading, if any, should be negligible given thin margin.
We think Adaro is an interesting prospect given its size, long-term growth potential, and potential M&A angle.
However, the recent plan to acquire related-party companies up to US$100mn raised corporate governance issue, particularly as question on investment in a related-party asset management firm lingers.
Valuation: does not look cheap, trading at 20% premium relative to PE and EV/Ebitda of its domestic peers. Underperform.