Initiating coverage with a BUY, TP of Rp2,650
We initiate coverage on ADRO, the second largest Indonesian coal mining company by production. ADRO’s 824mn tons of mineable reserves are located in the Tanjung District. The reserves are the third largest in Indonesia, with a mine life of over 10 years. There are 2 mine sites – Tutupan and Wara. ADRO’s production is estimated to grow by 12.0% p.a. over the next 3-years, driven by strong coal demand, while its fully integrated supply chain shall ensure production costs remain low. A strong net cash position is its key trait, ensuring growth can be sustained both organically and inorganically. The company’s latest acquisition is a 25% stake in Maruwai, a coking coal mining project. The EBITDA margin will be robust at around 35-39% in 2010-11F, assuming a conservative coal price of US$90-98/ ton. We value the company at Rp2,650/share, implying 21-15x 2010-11F P/E and 9x-7x 2010-11F EV/EBITDA, at the top end of the historical average, but well justified by its strong production growth profile and low production costs compared to its peers.
Coal production ramped up
Indonesia’s second largest coal producer, ADRO is set to see its coal production grow by 12.0% p.a. over the next 3 years. Supporting its growth is a conveyor belt connecting its mine to crushing plants, maximizing production capacity with minimum downtime. Help also comes from its wholly owned subsidiary, SIS, a coal mining contractor company to back it up - note that 26% of ADRO’s total production is mined by SIS. This expansion will cost around US$1.4bn over the next 5 years, yet shall easily be financed through internal cash flow. Additional debt could be an alternative, but is less of a priority. Worth noting is the higher stripping ratio that comes with the higher production, as more pits are opened. We estimate the stripping ratio to increase to 5.5-5.2x this year and next – but this will be more than compensated for by the higher production growth. Yet even with a higher stripping ratio, the EBITDA margin should reach a healthy 35.5% this year.
Low cost producer
ADRO’s production costs could be as low as US$28-29 per ton in 2010-11F, the lowest in the industry. Having its own terminal port, barging and coal handling, as well as power plants, are key reasons for its low cost production. This could save ADRO around US$5-10/ton compared to its peers. Better still, costs will likely decline by US$2-3/ton over the next 5 years once the conveyor belt projects (OLC) – which are divided into 2 phases, connecting the Tutupan mine site to crusher plants in Kelanis – are completed. The first phase of the project (37.8km of a total 75km) will be completed by 2012. The OLC project will enable ADRO to transport coal mined from Tutupan to Kelanis using a single conveyor belt powered by a mine mouth power plant, whose fuel shall be its own non-sellable coal.
Lower gearing
ADRO’s strong cash position - as shown by the 1.20x-1.36x cash ratio in 2010-11F and net gearing of around 0.22x-0.02x in 2010-11F ensures that the company will be able to seize on any available opportunities in the industry – or even pay hefty dividends to its shareholders. In 2010, ADRO’s cash of Rp11tn will be more than enough to finance the 2010 capex of US$700mn, of which US$350mn will be used to acquire a 25% stake in the Maruwai Project, marking the company’s move into the coking coal business. The other US$350mn will be used to finance the OLC and mine mouth power plant projects, and also for upgrading coal terminal capacity.
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