Adaro reported net revenues in 1Q10 of Rp6.3tn (-3.9%yoy) due to lower average selling price and appreciation in the rupiah against US dollar ( in US dollar, revenue rose by 20.7%yoy to US$677.9mn) However, largely due to higher interest expenses, net income dropped by 24.8%yoy to Rp861bn, slightly above our estimates. Coal production and sales volume grew significantly. We expect coal production in FY10F to reach 46Mt (+13.3%yoy), which will likely ! result in Rp27.3tn (+1.5%yoy) in revenues. We have changed our forecast for operating parameters, revised our WACC valuation and coal price benchmark. This resulted in DCF valuation of Rp2,522/share equity valuation. We upgraded our recommendation from Neutral to Buy.
1Q10 results … as most of income, cost and debt are denominated in the US dollar, a 20.4% appreciation on average rupiah exchange rate against the US dollar compressed Adro’s performance. Despite a 25.8% yoy increase in production to 11.4Mt and 31.3% yoy gain in sales volume to 11.5Mt, lower average selling price dragged 1Q10 revenue down 3.9% yoy to Rp6.3tn. The company’s interest expenses doubled from the 1Q09 due to accrued interest of its senior notes, resulted in 24.8% dropped in net profit to Rp861bn from a year earlier, (down 5.7% yoy in the US$ term to US$92.9mn).
FY10 forecast and our assumptions … We predicted its coal production in FY10F to reach 46Mt (+13.3%yoy), in line with company’s target. The company said that around 80% of fuel requirement for 2010 have been hedged at US$75/barrel; total fuel requirement may reach 460mn liters or 10.0 liters per ton of coal production, compared with 9.85 liter per ton in FY09. We have factored in the changes in our valuations. We assume FY10F average selling price at US$60.8/ton, cash cost per ton at US$33.7, and stripping ratio at ! 5.0 Bcm/t on.
Valuations … We increased our coal price benchmark to US$90/ton. Using WACC of 12.6%, consisting cost of debt of 8.3% and cost of equity of 15.0%, we arrived at DCF-derived TP of Rp2,600/share. Our TP implies PER10-11F of 21.0x and 15.4x, respectively, currently it trades at PER10F of 17.1x. Our TP has a 22.4% upside to the current price; therefore we upgraded our call from Neutral to ! Buy.
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