Adaro Energy (ADRO.IJ Rp 3,920; HOLD TP Rp 4,100) Potential upside from AADI post spin-off; lowered rating to Hold with a higher TP of Rp4,100

Stock Code	Last Price	Change	Change %
MFIN	4,600	920	25.00%
DCII	167,400	650	0.39%
GGRM	10,225	375	3.81%
FORU	1,690	335	24.72%
LIFE	6,600	300	4.76%
JSMR	4,590	250	5.76%
UNVR	1,725	230	15.38%
INKP	5,275	225	4.46%

Adaro Energy (ADRO IJ)

Potential upside from AADI post spin-off; lowered rating to Hold with a higher TP of Rp4,100

We estimate base-case valuation of AADI’s equity at US$6.1bn and ADRO’s valuation (post- AADI spin-off) at US$5.3-7.0bn.
Key risk is downside if the market assigns a bigger Holdco disc.; this may be minimized with more visibility on renewable projects.
We raised our TP to Rp4,100 but lowered our rating to Hold, based on our latest valuation of ADRO and AADI.

AADI: Potential strong FCF in FY26 onwards

We forecast AADI’s FY25/ FY26F EBITDA of US$1,245mn/ US$1,119mn, a decline due to our assumption of normalizing coal price forecast (Newcastle FY25/26F of US$120/$110 /t). Nonetheless, we see steady free cash flow generation from AADI, particularly in FY26 onwards due to minimal capex for mining; we assumed capex to peak in FY25, mainly to fund the completion of CFPP (remaining capex of US$650mn). We think AADI will have the capacity to pay out dividends above the indicated 45% payout ratio in its prospectus.

Potential upside in AADI vs. ADRO Post spin-off downside

We estimate that post-spin-off of AADI, ADRO’s valuation would be at US$5.3-7.0bn. Our base-case valuation of AADI’s equity is US$6.1bn, mainly incorporating the valuation of thermal coal operation and the CFPP (KPI). This implies that post AADI’s spin-off, ADRO shareholders may potentially see 9-31% (US$0.7-2.4bn) downside from current market capitalization. However, shareholders who subscribe to AADI may potentially see 112-171% upside (US$3.0-4.5bn), assuming our fair valuation (please refer to Exh. 1-2).

Renewable projects hold key for ADRO’s future (post spin-off) valuation

We think the key risk for shareholders is the downside on ADRO, particularly if the market assigns a bigger Holdco discount. This risk may be minimized if we have more visibility on ADRO’s renewable projects. We observed that global companies with renewable projects trade at a median market cap of US$1.1/ GW), though the caveat is that ADRO’s hydro project is only slated for completion by FY30.

Rating change to Hold with a higher TP of Rp4,100

We lower our rating on ADRO to Hold, with a higher TP of Rp4,100 (pre-spin off), now based on the valuation of ADRO and AADI post- spin off. Key risks are: weaker coal price, bigger Holdco discount for ADRO post spin-off.

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