In 2Q19, ADRO succeeded to make a surprise with financial performance that grew beyond expectation, while the coal market was still wobbly. ASP decreased 8% YoY, but revenues and net profits, respectively grew 10% YoY and 47% YoY thanks to increasing production and sales volumes accompanied by cost-efficiency.


Beyond Expectation Performance

In 2Q19, ADRO successfully booked revenues of USD929 million (+10% YoY, +10% QoQ), gross profits of USD300 million (+13% YoY, +13% QoQ), EBITDA of USD338 million (+7% YoY, +17% QoQ), and net profits of USD178 million (+47% YoY, +50% QoQ). It efficiently controlled its costs during 2Q19, reflected in the respective growth of GPM to 32% (vs. 1Q19 of 31%), OPM to 27% (vs. 1Q19 of 24%); thus, ADRO was capable of maintaining healthy margins.

Sales Volume and Cost-Efficiency

ADRO recorded coal production of 14 million tons (+12% YoY, +7% QoQ) enabling ADRO to increase coal sales volume to 15 million tons (+20% YoY, +16% QoQ). Export sales grew to 78% (vs. 1Q19 worth of 73%) as China and India have high demands for coal after exports curbs in 1Q19. However, ASP of USD56/ton (-8% YoY, -3% QoQ) gave no impacts on ADRO’s performance because it managed to record stripping ratio at 4.6x (-8% YoY, -0.2% QoQ): a form of cost-efficiency. We project that for 2019F, ADRO will still be able to record coal production of 55 million tons, with the coal sales volume of 58 million tons accompanied by stripping ratio in the range of 4.4x-4.5x.

Wobbly Coal Market

The average global coal price in 2Q19 was USD80/ton (-18% YoY, -16% QoQ) which continues to experience a downward trend; thus, the NDRC currently plans to maintain Chinese coal benchmark price in the range of USD70/ton-USD98/ton. The policy makes it hard for coal miners to post significant increases in revenues, appropriate for the remaining 2019. We project that the average coal price for 2019F will be in the range of USD83/ton-USD85/ton.

BUY Rating with the Price Target of IDR1,600

ADRO’s strong business structure and investment in mining infrastructure underline our BUY recommendation with the price target of Rp1,600 or a 19.9% upside potential based on a 7.8x (+1 SD) forward P/E. ADRO is currently traded at a 7.0x 2019F P/E.


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