Adaro Energy (ADRO.JK), Alert: Solid 4Q11 Results; Margins Firming Up, Citi

 What stood out in the numbers — Net earnings more than tripled Y-Y in 4Q11 (+64%
Q-Q) to US$175m on higher ASP. This brings 2011 net earnings to more than double YY
to US$550m – 5% above consensus estimate and 15% above Citi’s. While the surge
in net earnings was mainly due to the low base in 4Q10 (on heavy rainfall) and one-off
item in 3Q11, the operating results were robust in 4Q11. Gross and operating margins
firmed up sequentially in 4Q11 to 39.7% and 35.1% respectively, from 35.6% and
32.4% in 3Q11, thanks to a substantially higher ASP and good cost control.


 ASP slightly ahead; costs inflation below — With benchmark coal prices firming up
in 2-3Q11, Adaro’s ASP logged a substantial sequential improvement, rising to an
estimated US$79/t in 4Q11 from US$75/t in 3Q11. This is ahead of our estimate of
US$77/t. Adaro’s cash costs came in at US$41.2/t in 2011 (+14% Y-Y), ahead of its
guidance of US38-40/t, but below our estimate of US$42.5/t.

 2012E company guidance — Management expects production at 50-53m tons in
2012E (5-11% Y-Y growth). We think the 5% indication is likely to be an overlyconservative
scenario. In contrast, we currently forecast production growth of 15% in
2012E at 55m tons, c. 4% over the high end of the company’s indicated range. Adaro
expects its stripping ratio to rise slightly to 6.4x (blended) in 2012E from c. 6.3x in 2011.

 Outlook for 1H12 ASP — The softening of benchmark coal prices in 2H11 could weigh
down on Adaro’s ASP in 1H12. Hence, the ASP in 1Q12 could be down Q-Q but up Y-Y
due to 1Q11’s low base. However, as we expect a substantial rebound in benchmark
coal prices in 2H12, on increase purchase by India and China, we expect ASP at
US$75/t in 2012E, a slight increase from 2011’s estimated US$73/t on firmer
benchmark coal prices.

 Recommendation and catalysts — We expect Adaro to continue delivering good
production data in 1Q12 and throughout 2012E. In our view, this should reassure the
market of the company’s robust medium- to long-term growth potential. We maintain
our Buy rating on Adaro given its attractive valuation at 2012E EV/EBITDA of 4.1x –
well below its mean since listing of 5.5x.

Download file : ADRO mar2812