Reduction in WACC. We have reduced our WACC estimate from 16.4% to 9.9% as a result of lower risk-free rate assumption and market risk premium given better market condition. The benefit of lower WACC has however been partially offset by lower exchange rate. We keep our key assumptions constant, aside from fine-tuning our long term production numbers and increasing our fuel price. After composite adjustments, our DCF derived equity value rises from Rp1,150/share to Rp1,400/share.
Re-negotiation is only a short-term benefit. ADRO renegotiated rices for coal sold under legacy contract in FY09 but as the price increase upset ADRO’s customers, ADRO will recoup this short-term gain in later years by adjusting prices of long-term contracts accordingly.
Orchard Maritime (OML) acquisition should be beneficial. ADRO has acquired OML, which is a coal barging company and its affiliate. Acquisition is not cheap yet fair as the acquisition price of US$78.5mn implies about 5-6x Enterprise’s liabilities are however not less, with outstanding debt of US$135mn. The benefit of the acquisition includes amongst others - 1) Other income from selling extra barging service and transshipment service in the spot market 2) Lower demurrage cost.
Production at Wara mine to stream-line. ADRO has signed three new contracts out of which one contract relates to Wara coal (about 3900kcal), implying that production at wara mine will soon stream-line and that its ASP will lower in future.
Buy call. Our TP of Rp1,400/share implies PER09F of 10.4x and EV/Reserves of 4.8x. Its 18.6% upside to current price so we maintain our Buy call.
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