ADRO BUY TP 2750
Adaro Energy (ADRO IJ) - Greedy when others are fearful
We remain bullish on Adaro Energy (ADRO), considering their solid earnings estimate with 2018 – 19F net profit amounting to USD529mn and USD674mn, respectively (+9.4% and +27.4% YoY, respectively). Furthermore, no structural fundamental issue is foreseeable in the near term. Thus, we still maintain our target price for ADRO at IDR2,750 and reiterate our Buy call. Currently, ADRO is trading at 2018F - 19F P/Es of 8.3x and 6.5x, respectively. Our downside risks are changes in government’s regulation and lower global coal prices.
No fundamental issue behind the plunge in share price
ADRO’s share price dropped by 9.9% today on the back of lower 1Q18 financial results. Apparently, lower 1Q18 coal production is the sole cause for lower 1Q18 financial results. However, we believe that ADRO’s lower 1Q18 coal production was only seasonally affected by the rainy season during 1Q. Meanwhile, dry season will start on April; thus, we believe that ADRO’s coal production will improve in the next quarter, given better weather condition. In addition, in our latest report (“First walk, then sprint”), we mentioned that Indo Tambang Raya Megah’s (ITMG) 1Q18 coal production will decline compared to 4Q17 due to higher rainfall. For reference, ITMG’s and ADRO’s coal mining sites are located in Kalimantan.
Global coal price remains solid
We haven’t seen any signs of downward pressure on global coal price in the near term. That said, we predict that full-year 2018F global coal price will stand at USD85.0/tonne. We used a conservative assumption when setting our global coal price forecast (please see our latest coal sector report “On a high note”).
Maintain our earnings estimate
As we leave our forecast assumptions unchanged, we uphold our revenue forecasts at USD3.2bn in 2018 and USD3.5bn in 2019 and our gross profit forecasts at USD1.1bn in 2018 (-4.3%YoY) and USD1.3bn in 2019 (+19.9%YoY). We also maintain our full-year net profit forecasts at USD529mn in 2018 (+9.4% YoY) and USD674mn in 2019 (+27.4% YoY), respectively.
Maintain TP at IDR2,750 and reiterate a Buy call
Keeping the same earnings estimates, we maintain our target price at IDR2,750 and reiterate our Buy call on ADRO, since the target price implies 54.9% upside potential. Currently, ADRO is trading at 2018F – 19F P/Es of 8.3x and 6.5x, respectively. Our downside risks are changes in government’s regulation and lower global coal prices. Even so, we appreciate ADRO’s efficiency strategy to offset the DMO impact and are thus optimistic that ADRO’s eanings will remain solid over the longer term.
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