NISP Adaro posts lower net income in 1Q10 (ADRO, Rp2,200, Buy)

• During 1Q10, Adaro posts Rp861bn of net income, 24.8% YoY lower from Rp1.1tn a year earlier. The net income came in at 22.7% of the consensus and 23.2% of our full year expectation.

• Most of the decrease was attributable to lower revenue of Rp6.3tn, 3.9% YoY lower from Rp6.5tn in 1Q09. Despite that coal volume sale was 31.3% YoY higher at 11.5mn tons, Adaro had to be satisfied with selling price that was lower compared to 1Q09 period which was still benefiting from the surging coal price in 2008. This was also added by the translation as the company recorded its financial in Rupiah. Kindly recall, the currency appreciated significantly to Rp9,262 on 31 March 2010 from Rp11,631 in 31 March 2009.

• For COGS, the company’s higher sales volume boosted its COGS to Rp4.0tn from Rp3.7tn. Hence, gross profit decreased to Rp2.2tn from Rp2.8tn. However, despite posting higher nominal COGS, the company’s cash cost/ton is decreasing to US$30.2/ton in 1Q10, 2.3% YoY lower from US$29.5/ton in 1Q09.

• Furthermore, the company’s operating income decreased by 11.5% YoY to Rp2.1tn in 1Q10 from Rp2.3tn a year earlier. Thus, as Adaro had to pay higher interest expense on it’s recently issued global bonds, the company’s pretax income decreased by 21.6% YoY to Rp1.7tn.

• Overall, the condition was expected as stronger Rupiah and lower ASP may drag down the company’s financial performance this year. However, the company managed to deliver a strong operational performance as it was able to maintain production speed during 1Q10 from 4Q09. Thus, the company is likely to post an all time high for its production volume this year of around 44.9mn tons of coal.

• Currently ADRO is trading at 2010F PER of 19.0x and EV/EBITDA of 8.5x, Buy.