Mandiri Sekuritas ADRO:Rupiah attrition

Adaro booked 1H10 net profit of Rp1.2tn (-48.7%yoy) compared with Rp2.2tn a year earlier. The 17%yoy appreciation of the rupiah against the US dollar in 1H10 dragged down the rupiah-denominated revenue to Rp12.0tn (-7.1%yoy). In US dollar base, revenue was booked at US$1.3bn (+11.9%yoy), due to higher sales volume. Meanwhile, increasing stripping ratio in 1H10 to 5.5x compare dwith 5.0 in FY09 boosted cost of revenue and dragged down gross profit margin to 32.9% from 42.2% in 1H09. We adjusted our foreign exchange rate and stripping ratio o! n our est imates, arriving at new target price of Rp2,500. We maintain our Buy recommendation on ADRO.

1H10 results below expectation. ADRO’s 1H10 revenue of Rp12.0tn was only 43.8% of our FY10 target, due to lower average selling price and the US dollar’s depreciation. ASP in 1H10 was only US$55/ton (-10.6%yoy) compared with US$62/ton in 1H09, and the 17.0% drop in the US dollar’s value against the rupiah oppressed revenue when expressed in the local currency. Coal production in 1H10 totaled 21.6Mt (+20.2% yoy) and sales volume 21.8Mt (+22.0%yoy)

Higher stripping ratio. Higher stripping ratio and higher production volume are the main factors that increased cost of revenue by 7.9%yoy. Stripping ratio in 1H10 was 5.5x compared with 5.0 in 1H09, meanwhile overburden removal was up by 11.7%yoy to 106.7Mbcm, due to higher coal production. Higher stripping ratio aligned with the company ordinance to extract more overburden and goes into costly part of the mine due to higher coal market price.

Adjusted our forecast. We maintain our FY10 coal production estimate at 46Mt. We adjusted our stripping ratio to 5.5x from 5.0x previously and lowered our ASP assumption to US$56/Mt, generating FY10 revenue of Rp25.0tn, based on FY10F average US dollar exchange rate of Rp9,100/US$.

Maintain Buy. We used DCF valuation, WACC 11.6% consist cost of debt 7.1% and cost of equity 14.0%. Our new TP is Rp2,500 per share, indicating that ADRO is trading at PER11F of 17.2x. We maintain Buy recommendation on ADRO.