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Adaro Energy (ADRO IJ) Stronger Than Expected Result

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Adaro Energy (ADRO IJ) Stronger Than Expected Result November 2, 2017 Christine Natasya +62-21-515-1140 [email protected] To subscribe to our Daily Focus, please contact us at [email protected] LPPF 3Q review: below forecast, but valuation is attractive 3Q17 review: Overall, earnings come in below our estimates Market Index Last Trade Chg (%) MoM YoY For 3Q17, LPPF posted net profit of IDR166.9bn (-84.7% QoQ, -63.2% YoY), JCI 6,038.1 0.5 1.6 11.1 bringing cumulative 9M17 bottom line to IDR1.5tr, running short of our full-year MSCI Indonesia 26.8 0.5 0.0 3.1 estimate (68% run rate to our forecast). We were previously too conservative in MSCI EM 1,128.9 0.9 3.3 25.7 forecasting the company’s operating expenses. Notably, the company has been HANG SENG 28,594.1 1.2 2.5 23.8 striving for efficiencies by using LED lightning and taming labor costs, leading to a KOSPI 2,556.5 -0.1 6.8 29.2 higher operating profit vs. the consensus. Therefore, we lowered our operating FTSE 7,488.0 -0.1 0.7 9.5 profit estimates by 8%/5% for 2017F and 2018F. Regarding top line, LPPF booked DJIA 23,435.0 0.2 3.6 30.2 revenue of IDR1.81tr in 3Q17, dropping 53% QoQ and 22.7% YoY. Cumulatively in 9M17, LPPF booked net revenue of IDR7.5tr, running slightly behind our full-year NASDAQ 6,716.5 -0.2 3.2 31.8 forecast (run rate of 70%) and the full-year consensus (run rate of 73%; 9M Valuation usually hovers at 75-76%). We lowered our top-line forecasts by 7%/5% in 2017F 2017F P/E (x) P/B (x) ROE (%) JCI and 2018F, and reduced our SSSG estimates to -2%/2% for 2017F and 2018F, 17.6 2.6 18.5 respectively. Key Rates Last Trade Chg (bps) MoM YoY Expecting a SSSG rebound in 2018F BI 7-Day RR 4.25 0 0 -100 In 9M17, LPPF’s SSSG came in at -2.7%. Its 3Q17 SSSG stood at -26%, mostly 3yr 6.30 -1 26 -58 weighed by a drop in volume (-24.5%) due to the post-Lebaran effect, although its 10yr 6.77 -3 26 -47 average unit retail sales only dropped by -1.7%. Although SSSG was very weak in 3Q17, management actually sees a recovery in August and September SSSG. FX However, they still keep their 2017F SSSG guidance at flat to negative low single Last Trade Chg (%) MoM YoY digits. Meanwhile, management is optimistic for 2018, given the very low base of USD/IDR 13,580.00 0.1 0.2 4.0 2017 and the fact that purchasing power typically rises in a pre-election year. USD/KRW 1,114.40 -0.5 -2.7 -3.0 Upgrade to Trading buy USD/JPY 114.18 0.5 1.3 10.5 USD/CNY 6.60 -0.2 -0.3 -1.9 Although we cut LPPF’s earnings estimates, we upgrade our recommendation on the company to Trading Buy from Hold, as LPPF’s stock price has dropped sharply, Commodities resulting in strong upside potential to our new target price. In addition, we expect Last Trade Chg (%) MoM YoY a turnaround next year due to a very low base from 2017. Although e-commerce WTI 54.3 -0.1 6.7 8.4 might pose a threat to the company, we believe valuation is currently attractive. Gold 1,274.7 0.3 0.3 -1.7 Our target price is now IDR10,100, which implies 13.6x 2018F P/E. Coal 100.0 0.1 2.8 -12.9 Palm Oil 2,804.0 -0.7 2.5 1.7 Rubber 120.5 0.0 -8.1 -9.5 Nickel 12,295.0 5.3 17.1 18.2 Copper 6,839.0 -0.4 5.5 39.0 Monthly SSSG Tin 19,400.0 0.1 -6.3 -7.1 50% JCI Index VS MSCI Emerging Markets 40% (pt) (pt) JCI MSCI EM 30% 6,500 1,250 20% 6,000 1,100 10% 5,500 0% 950 5,000 -10% 4,500 800 -20% 10/16 01/17 04/17 07/17 10/17 -26% -30% 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 JCI MSCI EM (pt) (pt) Source: Company data, Mirae Asset Sekuritas Research Indonesia 1,100 5,500 950 Mirae Asset Sekuritas Indonesia 4,500 800 3,500 650 04/13 01/14 10/14 07/15 04/16 Adaro Energy (ADRO IJ) Stronger than expected result Cumulatively from January to September, Adaro Energy (ADRO) posted stronger-than- Mining expected financial results, with net profit of USD372.5mn, achieving 81.3% of the full- year consensus target. Meanwhile, we leave our earnings estimates unchanged, and hence maintain our target price of IDR2,425 on ADRO, with a Buy rating (as TP implies Company Report 32.9% upside potential). ADRO is currently trading at a P/E of 11.1x and 8.7x in 2017F November 1, 2017 and 2018F, respectively. The short-term downside risk is a drop in global coal prices, which could hit ADRO’s earnings. Solid production numbers for three consecutive quarters (Downgrade) Buy For 3Q17, ADRO posted solid operational numbers, with coal output of 14.2mn tonnes Target Price (12M, IDR) 2,425 (+7.2% QoQ), likely due to conducive weather conditions during 3Q17. Cumulatively in 9M17, ADRO produced 39.4mn tonnes of coal, relatively flat compared to the same Share Price (10/31/17, IDR) 1,825 period last year. For 4Q17, we are optimistic that ADRO will produce 14.6mn tonnes of coal (+2.8% QoQ). Meanwhile, ADRO’s stripping ratio stood at 4.65x in 9M17, while the Expected Return 32.9% company expects full-year stripping ratio of 4.85x. In addition, ADRO’s overburden removal increased to 183.2mn bcm (+4.8% YoY). Growth of both top and bottom lines Consensus OP (17F, IDRbn) 11.5 For 3Q17 top line, ADRO posted single-digit quarterly growth with revenue of EPS Growth (17F, %) 17.0 USD889.6mn (+8.1% QoQ), due to increases in both coal sales volume and ASP. Coal P/E (17F, x) 11.1 sales volume in the quarter reached 14.2mn tonnes (+7.0% QoQ) due to higher coal Industry P/E (17F, x) 9.3 production. Furthermore, ADRO’s coal ASP stood at USD58.8/tonne (+1.3% QoQ). All Benchmark P/E (17F, x) 17.5 in all, ADRO’s 3Q17 net profit expanded to USD150.1mn (+19.8% QoQ). We maintain Market Cap (IDRbn) 59,973.7 our full-year net profit forecasts at USD392mn in 2017 and USD500mn in 2018. Shares Outstanding (mn) 31,986.0 Operating cash flow surged 51.3% YoY Free Float (mn) 14,023.2 Institutional Ownership (%) 53.2 Notably, as of 9M17, ADRO’s operating cash flow surged to USD816.6mn (+51.3% Beta (Adjusted, 24M) 1.3 YoY) due to higher payment from customers, which reached USD2.4mn (+41.1% YoY) 52-Week Low (IDR) 1,395 in 9M17. Meanwhile, ADRO’s interest-bearing debt payment reached USD35.9mn, 52-Week High (IDR) 1,995 relatively flat compared to the same period last year. Going forward, we believe that (%) 1M 6M 12M ADRO is in a better position to manage its operating cash flow over the longer term. Absolute 0.0 2.8 15.1 Maintain TP of IDR2,425; Buy call Relative -1.8 -2.8 4.4 As we leave our earnings estimates unchanged, we maintain our target price for ADRO (D-1yr=100) JCI ADRO at IDR2,425. We also maintain our Buy call, as our target price now implies 32.9% 130 120 upside potential. ADRO is currently trading at P/Es of 11.1x and 8.7x in 2017F and 110 2018F, respectively. The short-term downside risk is a drop in global coal prices, which 100 90 could hit ADRO’s earnings. 80 5/17 8/17 11/16 12/16 1/17 1/17 2/17 3/17 3/17 4/17 5/17 6/17 7/17 8/17 9/17 10/17 10/17 11/16 12/14 12/15 12/16 12/17F 12/18F 12/19F FY (Dec.) PT. Mirae Asset Sekuritas Indonesia Revenue (USDmn) 3,325 2,684 2,524 3,002 3,394 3,609 Gross Profit (USDmn) 720 543 685 959 1,194 1,476 Operating Profit (USDmn) 560 410 534 779 990 1,260 Coal Net Profit (USDmn) 178 152 335 392 500 638 EPS (IDR) 69 66 141 165 211 269 Andy Wibowo Gunawan BPS (IDR) 1,262 1,445 1,595 1,724 1,901 2,125 +62-21-515-1140 (ext: 243) P/E (x) 15.1 7.8 12.0 11.1 8.7 6.8 [email protected] P/B (x) 0.8 0.4 1.1 1.1 1.0 0.9 ROE (%) 5.5 4.5 8.8 9.6 11.1 12.7 ROA (%) 2.8 2.6 5.1 5.2 6.7 7.8 Note: NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Sekuritas Indonesia Research estimates PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. Adhi Karya (ADHI IJ) 3Q17 review: Relying on next quarter Adhi Karya (ADHI) delivered another soft earnings performance in 3Q17, continuing the Construction trend it has exhibited throughout the year.
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