Danareksa Adaro Energy (ADRO IJ, Rp 1,980 BUY) 1H10 earnings: below expectations

Highlights:

Coal production was down 9.7% qoq in 2Q10 on the back of heavy rains in Kalimantan. On a yoy basis, however, coal production was still up 14.6% in 2Q10. In 1H10, coal production reached 21.6Mt, or 47.0% of our full year forecast – i.e. inline.

Along with the slowdown in production, coal sales also slowed. They reached 21.8Mt in 1H10 (+22.0% yoy). Similarly, coal sales were in line with our forecast (the 1H10 sales were 47.3% of our full year forecast).

The stripping ratio increased from 4.3x in 1Q10 to 5.6x in 2Q10.

In regard to its mining contracting business, coal production and hauling was also in line with our target (46-47% of our full year target). Overburden removal was below expectations, however, and only reached 31-43% of our full year target.

While 2Q10 ASP increased slightly by 1.9%, lower coal production combined with a lower-than-expected contribution from coal mining services resulted in lower revenues, down by 9.1% qoq. In USD terms, revenues were down 7.6% qoq to USD626mn in 2Q10. 1H10 revenues of Rp11,985bn are only 42.6% of our FY10F target.

Production cash costs (ex. royalties) increased by 22.1% qoq in 2Q10. All in all, net profits were down 66.1% qoq in 2Q10. The 1H10 net income was below our expectations at only 28.9% of our FY10F target, while the core profits were only 33.7% of our FY10F target.


Comments:

The increase in the stripping ratio is not a cause for alarm since mining contractors tend to push overburden removal during the first two quarters of the year - and then concentrating on excavating the coal in the remaining two quarters of the year. However, we expect the stripping ratio to increase in the following quarters - as the actual stripping ratio is still below the company’s planned stripping ratio of 5.5x - due to heavy rains in Kalimantan.

We are reviewing our assumptions for coal mining contracting services, as the 1H10 overburden removal came in below our expectation.

Although there was a slight increase in quarterly ASP, the 1H10 ASP was still far below our FY10F ASP expectation. As a result, we are reviewing our ASP target for FY10F.

Mining, coal processing, freight and handling costs all contributed to the production cash cost increase, along with the increases in the stripping ratio and fuel prices in 2Q10 that affected the mining industry as a whole. This is likely to remain the case in the near future.

We are reviewing our forecasts and currently have a BUY call on ADRO with a TP of Rp2,650, implying FY10-11F P/E of 20.9-16.1x.