JP Morgan - Adaro Energy - Risk to consensus FY11 earnings forecast; downgrade to UW

We downgrade ADRO to UW and reduce PT to Rp1,700: On the back of slower volume and profit growth than peers, downside risk to consensus’ FY11E earnings forecast and high valuation, we downgrade ADRO from OW to UW and reduce our PT from Rp2,600 to Rp1,700. We think downward revision to consensus earnings is likely, and that
this could result in ADRO underperforming.

Investment drivers: We think the following factors will negatively affect ADRO share price performance in the next 6-12 months: Negatives: (1) Downward pressure on coal price; (2) Relatively slower FY11E volume and earnings growth compared to its peers; (3) Downward revision in consensus’ earnings estimates; and (4) High valuation (one of the most expensive on FY11E P/E). Upside risk: Higher-than-expected coal price.

Reduce our FY10E/FY11E net income by 13.7%/21.4%: With the lower-than-expected results recorded in 2Q10, we lower our FY10E and FY11E net income by 13.7% and 21.4%, respectively. In the past six months, the stock has underperformed the JCI index by 19.7%; despite the relatively small downside in absolute terms, we see further underperformance from here on the back of consensus downgrades and
because we estimate ADRO’s FY11 volume and profit growth will be among the lowest of industry peers.

Downside risk to consensus FY11E earnings: Our FY10E and FY11E net income forecasts are 16.9% and 32.2% below the Street’s estimates. We therefore see downside risk to consensus earnings, as the current consensus FY11E operating profit forecast of Rp11,798 billion implies an operating profit of US$27.3/ton, a level which has not been seen even when the coal price averaged US$125/ton.