Adaro Energy (ADRO.JK) TP Rp2,250

Alert: Over-Conservative or Misconstruction?
NEWS
Local papers (incl. Binsis Indonesia) quoted Adaro President Director Garibaldi Thorir as saying that Adaro would likely book net income ranging from US$577m to US$621m in 2012, which he admitted was a conservative target. This translates to only a 5%-7% increase from the indicated 2011E net earnings of US$550-580m. He was reported as saying Adaro aimed to produce 50-53m tons in 2012 (5%-11% growth over 2011).

COMMENT
We asked the company about the veracity of the numbers quoted by the local press. Adaro stated that they don’t give specific guidance on net income and that their 2011 financial statements are still being audited and will only be issued in late March. We think the 5%-7% earnings growth indication, if true, could mean the company expects: 1) ASP to drop to US$70/t from the estimated US$73/t in 2011; and 2) 2012 production of 50m tons. We opine that this is likely to be an overly-conservative scenario. In contrast, we currently forecast production growth of 15% in 2012E at 55m tons, slightly over the high end of the company’s indicated range. We expect ASP at US$75/t in 2012E, a slight increase from 2011 given that Adaro’s full-year ASP tends to lag by 2-3 quarters the spot prices.
However, if the indicated 2011E net earnings of US$550-580m prove to be true, this would come in substantially above Citi’s and market’s expectations of US$478m and US$515m, respectively.
We maintain our Buy call on Adaro given its attractive valuation of 4.9x 2012E EV/EBITDA (0.4 std below the stock’s mean since its listing).

Adaro Energy
Valuation
Our target price for Adaro Energy of Rp2,250 is based on a 2012E EV/EBITDA of 5.5x. We use the stock's mean multiple since its listing. We have opted to use EV/EBITDA as our valuation metric to avoid distortions caused by differences in tax rates between Indonesian companies and their regional peers.

Risks
Risks that could prevent the shares from reaching our target price include: a) coal price volatility; b) fluctuating crude oil prices; c) poor weather conditions that might hamper coal production; and d) overpriced acquisitions.


Source: Citi dated 2 February 2012