Indonesian Coal Mining Giant in Focus: Adaro Energy

Despite Indonesian President Joko Widodo having signed a regulation that will lead to a relatively cheap coal price for domestically-sold coal under the domestic market obligation, shares of Indonesian coal miner Adaro Energy rose 1.39 percent to IDR 2,190 a piece on Thursday (08/03).

The soaring coal price is currently pushing coal miners’ shares into higher territory. Indonesia’s benchmark thermal coal price (Harga Batubara Acuan, or HBA) rose to USD $101.86 per metric ton in March 2018, the highest position since May 2012. The high coal price comes on the back of strong coal demand in China, a country which still requires time to transform its energy mix from coal to renewable energy sources or gas.

The higher share price of coal miners stems from investors’ expectations of rising profit for coal companies. And indeed, Adaro Energy’s corporate earnings were good. In full-year 2017 its net profit rose 44.4 percent (y/y) to USD $483.3 million, while its sales rose 29.4 percent (y/y) to USD $3.3 billion. Analysts therefore advise investors to invest in Adaro Energy shares. By the end of the year the company’s shares are expected to touch a level between IDR 2,425 – 2,700 a piece, implying there remains plenty of room for further growth.

Adaro Energy, Indonesia’s second-largest coal miner, targets to produce 54-56 million tons of coal in 2018, up from 51.79 million tons in the preceding year. This is only a modest production growth target because the company wants to preserve plenty of coal supplies for its own power stations in the future.

Together with Japanese power companies Itochu Corporation and Electric Power Development (J-Power), Adaro Energy is developing the Batang coal-fired power plant in Central Java. This plant, which was troubled by serious land acquisition troubles, is designed to have an electricity generation capacity of 2 x 1,000 megawatts (MW) once it commences operations (expected) in May 2020. After this plant becomes fully operational, all the company’s power plants combined should account for around 15 percent of Adaro Energy’s total earnings.

Projection Adaro Energy’s Future Corporate Earnings:

2016 2017 2018F 2019F

Net Revenue 2,524 3,300 3,371 3,374

EBITDA 869 1,313 1,275

Net Profit 335 483 474 456

P/E Ratio (x) 12.7 8.9 9.3

in million USD, unless otherwise stated

Source: Danareksa Sekuritas (16/01/2018)

As Adaro Energy entered the power generation sector several years ago it is less affected by the new domestic market obligation (DMO) price. This new price mechanism, signed by President Joko Widodo on Wednesday (07/03), sets a more affordable price for coal that is sold on the domestic market to coal-fired power plants.

Around 80 percent of Adaro Energy’s coal sales is exported abroad, mainly to Malaysia and China. Meanwhile, the remaining 20 percent is sold on the domestic market. The company allocated between USD $750 million and $900 million for its capital expenditure budget in 2018.

So far in 2018 shares of Adaro Energy, listed on the Indonesia Stock Exchange, have risen 17.74 percent (reflecting a PER of around 10.7 times).