RHB Indonesia - Adaro Energy - Strong 2Q17 Earning (Adaro Energy, Ramayana Lestari) Unknown Selasa, 29 Agustus 2017




Good morning,

Adaro Energy – Strong 2Q17 Earnings

Adaro booked strong 2Q17 earnings of USD125m (+100% YoY, +29% QoQ), which were above our and consensus expectations. We think its stronger cash position should support higher dividends going forward. We fine tune our assumptions and tweak our 2017F-2018F earnings by 14% and 10% respectively. Reiterate BUY call with higher TP of IDR2,300 (from IDR2,100, 22% upside) as we believe consensus earnings upgrades would be near-term catalysts for its share price performance. Our TP implies 2017F and 2018F P/Es of 12.6x and 12.3x respectively.


¨ Strong 2Q17 earnings. Adaro Energy (Adaro) booked strong 2Q17 earnings (net of minority interests) of USD125m (+100% YoY, +29% QoQ) on the back of higher revenue (mostly due to stronger average coal selling price) and higher profit margins (2Q17 gross margin of 38.3% vs 1Q17’s 29.9% and 2Q16’s 25.2%), largely on effective cost management. 6M17 earnings (net of minority interest) of USD222m were above our and consensus expectations (6M17 represented 59%/53% of our/consensus FY17F expectations).
¨ Rising cash position. Adaro’s cash position continued to increase and reached an all-time high since 2009. In our view, Adaro has greater flexibility to distribute higher dividends going forward. This is because, as at Jun 2017, it held cash and cash equivalents of USD1.2bn, while its targeted capex for FY17F is only c.USD200-250m, with an average debt repayment schedule for 2017F-2019F at a manageable level of c.USD166m pa.
¨ Stronger balance sheet. Adaro’s balance sheet has strengthened further, with net gearing falling to 0.04x in 1H17 from 0.2x in 1H16, while net debt to last 12 months’ operational EBITDA has fallen to 0.14x in 1H17 from 0.94x in 1H16. This is due to strong free cash flows from its integrated mining operations.
¨ Stripping ratio to increase in 2H17 to reach targeted FY17 stripping ratio. Adaro’s average stripping ratio was 4.30x in 2Q17 and 4.45x in 1H17, which were below its 4.85x planned FY17 stripping ratio, due to a longer rainy season and higher rainfall at its mining sites in 1H17. Adaro expects to increase its overburden removal in the coming quarters, and expects its FY17F average stripping ratio to reach its guidance of 4.85x for the year – this suggests that its stripping ratio would increase to 5.25x in 2H17.
¨ Reiterate BUY call with higher TP of IDR2,300. We fine-tuned our cost assumptions in order to incorporate the strong 2Q17 earnings, and increase our 2017F-2018F earnings by 14% and 10% respectively. We reiterate our BUY call with higher DCF-derived TP of IDR2,300 (WACC: 13.7%. LTG: 0%) as we think consensus earnings upgrades should underpin its share price performance. Our TP implies 2017F and 2018F P/Es of 12.6x and 12.3x respectively.
Key risks to our call include a significant drop in coal prices, weaker-than-expected coal demand, and a significant increase in oil prices. (Hariyanto Wijaya, CFA, CPA, CMT)

Link to daily report: Indonesia Morning Cuppa 290817

Company Update:

Ramayana Lestari (RALS IJ, BUY, TP: IDR1,550), Closing 10 Supermarkets To Benefit Earnings
Ramayana’s plan to close 10 supermarkets this year should positively impact its earnings. Its supermarket unit has weighed on its overall performance, being in the red and having lacklustre strategic value for the company. Ramayana plans to turn the space into department stores or lease it to third parties. Concerns over its weak July sales have been priced in, along with most potential downside risks. As such, the stock is now trading at attractive 2017F/2018F P/Es of 17x/14x respectively. As we expect the Indonesian economy to improve in 2H, we think Ramayana’s risk-reward profile offer investors a solid option.

¨ Closing 10 unprofitable supermarkets. Ramayana Lestari Sentosa (Ramayana) plans to close 10 supermarkets, or 10% of its 98-supermarket network (as of end-2016). It has closed five supermarkets, and aims to shut down another five before year-end. In deciding which supermarket to close, it is considering factors like profitability, growth potential, historical performance, etc. Ramayana continuously evaluates its businesses, and this, in our view, may lead it to close more unprofitable operations moving forward.
¨ Supermarket segment offers dim strategic value. One of the company’s early strategies was to have supermarkets that would attract shoppers due to their competitive prices. Then, it hoped that these crowds would patronise its department stores. However, many consumers do not shop for groceries and fashionable items at the same time. Also, price-sensitive consumers are not exactly the kind of shoppers that would spend generously on discretionary consumer goods (ie items sold in department stores).
¨ Supermarket segment’s consolidated PBT fell 15% YoY in 2016. Ramayana’s supermarket segment is in the red. In 2014 and 2016, it posted PBT of IDR31bn and IDR79bn, which accounted for -9 and -22% of total consolidated PBT respectively. In our simple assumption that the supermarkets’ profitability is the same across the board, closing ten of them should improve PBT by 1.5%.
¨ Most potential downside risks have been priced in, and the stock is trading at attractive 2017F/2018F P/Es of 17x/14x respectively. We continue to like Ramayana for its efforts to turn around operations, and for its outlook based on the potential improvement of the Indonesian economy. Its share price pullback over the past month indicates that concerns over the weak July sales as well as the downside risks have been factored in. As such, it is now trading at attractive levels of 17x/14x 2017F/2018F P/Es respectively.
Our positive view is largely premised on the anticipation of an economic improvement for the rest of the year, driven by accelerated government spending and cheaper credit. With external tailwinds stemming from the accelerating economy and its internal business turnaround, we believe Ramayana’s risk-reward profile is decent, at current valuations. (Stifanus Sulistyo)
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Best regards,

Helmy Kristanto
Director
Head of Indonesia Research
PT RHB Sekuritas Indonesia

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