DBS (DP)
ADRO BUY TP 2800
Earnings to rebound from 1Q18 low
Stronger earnings momentum for the rest of this year. We believe ADRO’s profitability will recover in the remaining quarters of this year in the absence of one-off costs related to its mining contracting subsidiaries’ machineries maintenance and overhaul activities that took place in 1Q18. Going forward, ADRO’s earnings will be driven by higher coal output and sales volume, steady ASP as the current coal price benchmark is still hovering above our coal price benchmark of US$75 per ton, and stable operational cash cost.
Where we differ: We are bullish on ADRO earnings – further upside when coking coal output ramps up. ADRO‘s earnings growth prospects will remain exciting in 2018 and we believe the stock deserves to trade above 10.0x FY18 PE. Further earnings upside may come from a sustained coking coal production uptrend, with Adaro Met Coal (AMC) potentially delivering 50% higher margins vs. thermal coal, and we believe this catalyst has not been baked into the current share price.
Earnings momentum and steady coal price trend are share price catalysts. Besides the earnings recovery momentum that we believe will persist in FY18 and FY19, steady coal prices will also support ADRO’s share price. As such, we believe its earnings performance is likely to top consensus expectations this year.
Valuation:
We keep our BUY call with a DCF-based TP of Rp2,800 (WACC of 12.1% and terminal growth rate of 0%). This implies an FY19F PE of 10.6x, which is in line with its 5-year average.
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