Adaro Energy (ADRO) - Escalating Cost

Adaro Energy (ADRO) – Maintain BUY
Price: Rp2,225 – Target Price: Rp2,800

Escalating Cost

  • Net profit declined by 49.5% YoY and around 16% and 22% below consensus and our estimates.
  • Despite bad weather, ADRO managed to book higher coal production (+4% YoY) and sales volume (+6% YoY), inline our expectation.
  • Lower than expected net earnings were mainly due to higher cash cost, and demurrage charges incurred. Management aims to increase coal production to 46-48 mn tonnes in FY11. However, also expects higher stripping ratio of 5.9x (from 5.5x).
  • We cut our FY11-12 earnings forecast by 16%-8% on the back of higher cash cost.
  • We retain our BUY recommendation, but trim our price target to Rp2,800/share (from Rp3,250/share), implies 18.5x-13.4x PER’11-12.
  • Current share price weakness provides buying opportunity.