PT Adaro Energy Tbk (ADRO)
Coal Mining
Lower Demand Outlook
9M19 Performance: JV Income drives the bottom line
ADRO posted stronger-than expected financial results in 9M19, with net profit of USD405.99 million (+29.83% YoY), achieving 89.16%/83.04% of the full year consensus/MNCS target. This was mainly supported by higher revenue from JV at USD66.9 million (+201.65% YoY) from the loss of USD65.8 million in 9M18. Revenue was relatively flat at USD2.65 billion in 9M19 (-0.48% YoY) compared to USD2.66 billion in 9M18 due to the downward trend in the coal ASP since 74.92% of revenue came from exports, despite sales volume increased by 13.72% YoY to 44.66 million tons. Moreover, ADRO’s 9M19 stripping ratio stood at 4.76 (-9.16% YoY) this is in line with the company’s plan to lower the strip ratio.
Heading Towards Renewable Power!
ADRO is actively looking for power projects from renewable energy sources through its subsidiary, ADRO Power, to support the government program in providing 35,000 megawatts (MW) of electricity nationwide. Thus far, ADRO is in the process of developing several power plants, namely: 1) Batang Steam-electric Power Plant in Central Java with 2x1,000MW capacity managed by PT Bhimasena Power Indonesia; 2) Tanjung Power Steam-electric Power Plant in South Kalimantan with 2x100MW capacity, where ADRO supplies 1 million ton of coal or 2.24% of its yearly sales. Both steam-electric power plants are planned to start operating in FY20F; 3) Solar Power Plant in Kelanis, Central Kalimantan, although it is still used for internal purposes; 4) Solar Power Plant in Papua is in trial period with 50-100 kilowatt (KW) capacity per peak. For the next step, the solar power plant development proposal in Sumatera is being submitted, which is planned to have capacity of 100MW. The business diversification has contributed to 10.08% of the net profit through its joint venture profit amounted to USD66.9 million in 9M19. We estimate that the bottom line will reach USD483.82 million (-1.04% YoY) in FY20F supported by the 16.52% joint venture contribution. On the other hand, we also estimate the revenue will reach USD3.29 billion (-4.47% YoY) in FY20F with the sales volume and production volume reaching 56.47/56.12 million tons respectively in FY20F.
Challenges from Declining Demand and China’s Stunted Growth
World Bank predicts the global demand for coal to decrease by 1.17% YoY in FY20F where the biggest decline came from China up to 13.33% YoY. Although some countries such as India, other Asian regions, Mediterranean region, and other regions showed an increase but not significant enough to drive global coal demand. China is the most affected country by its trade war with US, reflected in the slowdown of China’s GDP growth in FY19 recorded at 6.1% from 6.6% in FY18, where FY19 GDP growth is the lowest growth rate in 29 years. Meanwhile, China as the biggest coal importer begins to limit its imports by applying coal cap up to 200-300 million tons in FY19 and increasing local coal production. As a result, ADRO coal exports to China are expected to decline, whilst China contributed up to 13% of the exports in 9M19, decreased by 2% QoQ from 15% of contribution in 1H19.
HOLD Recommendation for ADRO with Target Price IDR1,465
We recommend HOLD for ADRO with TP: IDR1,465 with implied PE/PBV 6.85x/0.74x in FY19 and 6.92x/0.70x in FY20F. Currently ADRO is traded at the level of -1 STD (3 years average) with P/E 7.42x and -0.5 STD (3 years average) with PBV 0.39x. In addition, the downward trend of coal price by 31.55% YoY (as per 23-Jan 2020) could hamper the growth of coal industry performance.
