· Adaro is currently eyeing to acquire Bhakti Energi Persada (BEP), a coal company that operates two mines with total coal reserve of 115.6mn tons. BEP is an active mine as it has commenced coal mining activity last year. Annual coal production for 2010F is estimated at 700k tons with 2011F target of 2mn tons.
· BEP requires US$400mn to boost its production next year; however, the company has not managed to obtain such funding.
· Adaro foresees it would not meet any obstacles in this transaction as BEP is owned by, Benny Subianto and T.P. Rachmat, which is also the owner of Adaro. Nevertheless, this transaction will be categorized as an affiliated transaction.
· Adaro will employ its internal cash to finance this acquisition as the company cash position stood at Rp5.3tn as of 1H10.
· We still wait for Adaro to update the rationale as the reserve in BEP is relatively small compared to Adaro’s 930mn reserves. Also, whether the proceeds will be injected in BEP or paid to the existing shareholders.
· Separately, Adaro’s share price posted a huge decline in the last few days amid two factors, which are 1) weak 1H10 bottom line and 2) rumors on placement at Rp1,500 – Rp1,750. We view that the second factor has a largest role in the decline; however, the company’s IR confirmed that there are no such plan for Adaro. On weak 1H10 bottom line, we view that this was largely due to higher effective tax rate and Rp127.3bn of forex loss in 2Q10.
· The company has a potential of posting a better performance in 2H10 due to stable mining activities as the planned stripping ratio is scheduled to be unchanged compared to a QoQ increase in 2Q10.
· Thus, recent hefty correction opens a cheaper entry to ADRO as it is currently trading at 2011F PER of 10.5x and EV/EBITDA of 4.9x, Buy.
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