Reinitiating Coverage:
Adaro Energy (ADRO IJ, BUY, TP: IDR2,100)
Power Plants As The Locomotive Of Growth
Adaro Energy (ADRO IJ, BUY, TP: IDR2,100)
Power Plants As The Locomotive Of Growth
As one of the world’s low-cost coal
producers, Adaro should enjoy higher earnings amid the outlook for higher coal
prices. We think incoming coal-fired power plants from the 35GW electricity
program and Adaro’s power plant JVs should boost its coal sales volume in
coming years. On top of that, the entrance of EGAT – the largest power producer
in Thailand – as a strategic investor in its subsidiary Adaro Indonesia should
increase Adaro’s coal sales volume. We re-initiate coverage with a BUY call and
DCF-derived TP of IDR2,100 (24% upside), implying FY17F P/E of 13.2x.
¨ Beneficiary of higher
coal selling price. We
think FY17 coal prices should trade in the USD70-75/tonne range (FY16 average
coal price: USD63) for China – the world’s biggest coal consumer and producer –
has an interest in its coal mining companies generating profit in order to
service their hefty bank loans. Our coal price assumption is USD73/tonne in
FY17, and USD70/tonne in FY18F and further. Higher coal prices from FY17 onwards
should increase Adaro Energy’s (Adaro) profitability and earnings, as by our
analysis, every 10% increase in coal price should increase its EPS by 19%.
♦ Power plants as the locomotive of future
volume growth. Adaro’s
envirocoal is well-known for its low-pollutant characteristics, which is
suitable for power plants. The commencement of commercial operations of the
35GW electricity program should boost domestic coal demand, which should
increase Adaro’s domestic coal sales volume. Meanwhile, in addition to
generating return on investment, Adaro’s coal-fired power plant joint ventures
(JVs) should also lift its coal sales volume. This is as Adaro would supply 5m
tonnes pa (mtpa) to Bhimasena Power Indonesia and 1mtpa to Tanjung Power
Indonesia, when the power plants begin commercial operations.
¨ Coal supply
commitment to EGAT to boost coal sales in coming years. The entrance of the
Electricity Generating Authority of Thailand (EGAT), the country’s largest
power producer, as strategic investor at Adaro Indonesia level should be
positive for Adaro’s coal sales volume in coming years. Adaro has have 20-year
coal commitment with EGAT, but no details are available. EGAT has 3.5GW
coal-fired power plants in the pipeline to operate by 2025. In 2014, EGAT consumed
20.4m tonnes of coal for its existing power plants.
¨ Returns on average
equity (ROAEs) should improve to ~10% in 2017. We estimate Adaro’s FY17F earnings
to grow by 39% YoY, mostly on the back of higher coal price. After booking
ROAEs under 10% since 2013, we estimate Adaro should chart above 10% in 2017,
driven by higher net margins.
¨ Re-iniatiate coverage
at BUY, with IDR2,100 TP. Our DCF-derived TP implies FY17F P/E of 13.2x (+0.1SD
from its 6-year mean P/E), which we think is justified, as we expect its FY17F
ROAE to increase and breach the 10% level.
♦ Key risks to our call include:
i. A significant drop in coal prices;
ii. Weaker-than-expected coal demand;
iii. A significant increase in oil prices
Kindly click the following link for the full report: Adaro Energy : Power Plants As The Locomotive Of Growth
Hariyanto Wijaya,
CFA, CFP, CA, CPA
Vice President
Research Analyst – Heavy
Equipment, Coal, Plantation
PT. RHB Securities
Indonesia
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