Flash Note Adaro Energy

ADRO IJ / ADRO.JK
31 August 2010

BUY
1H10 Results Price : Rp1,980
Target Price : Rp2,800

Key Financial and Valuation Metrics

Year-end 31-Dec 2008 2009 2010F 2011F 2012F

Revenue (Rpbn) 18,093 26,938 25,690 31,221 37,638
Net profit (Rpbn) 887 4,367 3,776 5,456 6,881
EPS (Rp) 28 137 118 171 215
EPS growth (%) 902.0 392.0 -14.0 45.0 26.0
DPS (Rp) 12 34 30 43 54
Dividend yield (%) 1.0 2.0 2.0 2.0 3.0
P/E Ratio (x) 71.4 14.5 16.8 11.6 9.2
EV/EBITDA (x) 15.0 6.4 7.6 5.4 4.2
Return on Equity (%) 11.0 28.0 21.0 26.0 28.0
Net Gearing (%) 4.0 11.0 9.0 12.0 14.0

Source: Company and NISP Sekuritas

• Bottom line well below expectation. Despite posting 22.0% YoY growth in sales volume, Adaro logged in a
disappointing 48.7% YoY decrease in net profit to Rp1.15tn in 1H10 from Rp2.25tn a year earlier. Such decrease was
due to three key factors, which are 1) lower ASP, 2) higher direct cost and 3) forex translation on stronger Rupiah.
The company’s bottom line came in only 28.9% to our and consensus’ full year expectation.
• Still posting growth in US$ basis... During 1H10, the company’s ASP dipped by 9.8% YoY from US$61/ton to
around US$55/ton in 1H10 period. However, as the company managed to improve its sales volume by 22.0% YoY on
higher coal production, Adaro’s revenue in US$ term still increased by 11.9% to US$1,304mn in 1H10 from
US$1,165mn a year ago. Nevertheless, stronger Rupiah, which increased by 17.0% YoY to an average of
Rp9,189/US$ in 1H10 from Rp11,067 in 1H09, eroded the company’s revenue , which was booked in Rupiah, to
Rp11.95tn from Rp12.90tn in the same period.
• ..but offset by increase in cost due to higher mining activities. At the same time, higher coal sales caused an
extra direct cost of 7.4% YoY to Rp8.00tn, largely due to an increase in planned stripping ratio from 5.0x to 5.5x due
to mining in deeper parts of the mine as well as a 20% production increase from 1H09. The company consistently
increased its planned stripping ratio in order to achieve its production target. During 1Q10, Adaro’s planned stripping
ratio was only 5.0x, which was lower than 1H10’s 5.5x.
• Higher effective tax rate played largest role in net income deterioration. Higher cost was also added by
higher effective tax rate of 54.4% from 47.1% a year earlier, which was due to higher taxes payable repayment and
the final payment of corporate income taxes for 2009, as well as some provisional payments for 2010. Thus, Adaro’s
1H10 net income plummeted by almost a half of its earning a year earlier.
• Decrease mostly occurred in 2Q10. Adaro’s performance deterioration mostly occurred in 2Q10, from lower sales
volume due to unusual heavy rainfall. As such, the company’s revenue decreased by 9.7% QoQ to Rp5.67tn
compared to Rp6.28tn in 1Q10. During the quarter, Adaro sales volume was 10.2% QoQ lower coal at 10.3mn tons
from 11.5mn tons in 1Q10. Selling price was relatively unchanged at US$55/ton during 1Q10 and 2Q10. Amid such
condition, the company also posted a higher production cost of Rp2.20tn, 4.8% QoQ higher from Rp2.10tn in 1Q10
due to higher coal processing cost despite lower sales volume. As such, the company’s total COGS was relatively
unchanged at Rp4.00tn in 1Q10 and 2Q10, which lowered gross profit and operating income by 4.3% QoQ and
26.4% QoQ respectively.
• EBITDA is inline with expectation, Buy stance maintained. In all, the company posted a weak performance in
2Q10, however this update is expected as the company had reported its lower QoQ operational data earlier. We also
see that weak net income was also affected by higher tax payment, which we consider normal and the company’s
operating income and EBITDA still came in at 43.9% and 47.8% to our full year expectation. We will adjust our forex
loss assumption, as the company had recorded Rp127.3bn of forex loss in 2Q10, however this new development
would not affect our DCF based valuation. Adaro is expected to post stronger performance in 2H10 as we expect a
lower planned stripping ratio and better ASP. Hence, we are still comfortable with our assumption on Adaro and
maintain our buy and target price on the counter.

Bagus Hananto
bagus@nispsekuritas.com
62-21-8379 5238 ext.7311
Adaro Energy

Exh. 1: ADRO’s 1H10 Results

(Rpbn) 1H09 1H10 YoY 4Q09 1Q10 2Q10 QoQ
Revenue 12,896.9 11,948.8 -7.4% 6,924.3 6,279.1 5,669.8 -9.7%
Gross Profit 5,444.4 3,946.6 -27.5% 2,622.5 2,245.8 1,700.8 -24.3%
Operating Income 4,670.1 3,569.7 -23.6% 2,352.6 2,056.5 1,513.1 -26.4%
- Interest Expense 364.8 585.8 60.6% 363.3 260.2 325.6 25.2%
- Foreign Exchange Losses (Gains) -0.3 121.5 n.a 163.6 -5.8 127.3 n.a
Pretax Income 4,358.6 2,537.0 -41.8% 1,802.3 1,700.4 836.6 -50.8%
Net Income 2,248.6 1,152.9 -48.7% 852.6 861.0 291.8 -66.1%
Gross Margin 42.2% 33.0% -9.2% 37.9% 35.8% 30.0% -5.8%
Operating Margin 36.2% 29.9% -6.3% 34.0% 32.8% 26.7% -6.1%
Net Margin 17.4% 9.6% -7.8% 12.3% 13.7% 5.1% -8.6%
Coal Production 18.0 21.6 20.2% 12.1 11.4 10.3 -9.7%
Coal Sales 17.8 21.8 22.0% 12.4 11.5 10.3 -10.2%

Source: Company

2
Adaro Energy

PT NISP Sekuritas
Puri Imperium Building (Head Office)
Office Plaza Unit G. 2, 3, 5
Jl. Kuningan Madya Kav. 5-6, Kuningan
Jakarta 12980 Indonesia
Phone. (021) 8379 5238 (hunting)
Fax. (021) 8379 5240
Email: info@nispsekuritas.com
Website: www.nispsekuritas.com

Research Team
+62 21 83795238
Bagus Hananto Deputy Head of Research bagus@nispsekuritas.com Ext 7311
Lyana Margareth Equity Analyst lyana.margareth@nispsekuritas.com Ext 7327
Ariawan Fixed Income Analyst ariawan@nispsekuritas.com Ext 7711
Yuni Pratiwi Research Assistant yuni.pratiwi@nispsekuritas.com Ext 7338

Branches
Phone: Fax:

Jl. Pluit Kencana Raya No. 59

Pluit Jakarta (021) 6667 5050 (hunting) (021) 6667 5051
Jakarta Utara 14450

Wisma HSBC, 3A Floor

Bandung Jl. Asia Afrika No. 116 (022) 426 7288 (022) 426 8009
Bandung 40261

Intiland Tower, 1st Floor Suite 7

Surabaya Jl. Panglima Sudirman 101-103 (031) 547 1213 (031) 547 1314
Surabaya 60271

Medan Jl. Bogor No. 51, Medan (061) 415 4512 (061) 456 4753

Rating Definitions
BUY : We expect this stock to give total return of above 15% over the next 12 months.
HOLD : We expect this stock to give total return of between -15% and 15% over the next 12 months.
SELL : We expect this stock to give total return of -15% or lower over the next 12 months.

DISCLAIMER:

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