Adaro Energy (ADRO IJ)

Solid operationals and coking coal ASP drove FY23 NP beat; conservative mgmt. FY24 target

 

  • The 4Q23/FY23 net profit beat was supported by solid production/sales volumes (+5/+7% yoy) and better ASP from coking coal
  • The Mgmt’s FY24 sales volume growth target implies a soft thermal coal market, inline with our view of further price normalization in FY24-25F
  • We fine-tuned our FY24-25F estimates (+10.5%/+28%vs.prev); Buy rating maintained with slightly higher TP of Rp2,850

4Q23 profit beat on solid operational deliveries, strong coking coal price

ADRO posted 4Q23 net profit of US$423mn (-28% yoy/ +22% qoq), bringing its FY23 net profit to US$1.64bn (-34% yoy, inline with ours and above consensus est. at 100/107% of FY23 estimates). Its FY23 operating profit of US$2.19bn (-49% yoy) is in-line with our estimate, supported by solid coal sales (66Mt. +7% yoy, 103% of our FY23 est.), from production growth at its newer mines (Balangan 8Mt +13% yoy, MIP: 4.2Mt +27% yoy), and manageable costs. FY23 ASP beat (US$96/t, -26% yoy, 141% of our FY23 est.) was aided by stronger-than-expected 4Q23 ASP of ADMR’s coking coal.

 

The Mgmt’s FY24 guidance implies a soft thermal coal market outlook

ADRO targets FY24 sales volume of 65-67Mt (implying -2% to 2% yoy), with flat sales volume for its thermal coal and thus only expects volume growth to be driven by ADMR’s coking coal (production growth target of 5.4-5.9Mt, +10-31% yoy). We see that the mgmt’s targets reflect a combination of: 1) a conservative outlook for thermal coal price  amid strong growth in Indonesia’s export. 2) better confidence in the coking coal market and ADMR’s coking coal logistic, following FY23 solid sales volume of 4.5Mt (+52% yoy, 5% above the initial target).

 

 

FY24-25F est. fine-tuned; thermal coal normalization remains a key driver

We fine tune our FY24-25F estimates, reflecting higher sales volume assumptions and ASP (mainly from coking coal), and introduced a FY26F net profit estimate. We continue to expect FY24-26F earnings to contract to reflect thermal coal price normalization amid higher supply growth vs. demand.

 

Maintain Buy rating with a slightly higher TP of Rp2850

We think ADRO’s low-cost operation and ample reserves shall sustain its strong FCF generation and dividend distribution (current yield of 12.4%) for LT investors, despite the current coal price correction cycle.  Our DCF-based TP of Rp2,850 is based on LT coal price of US$90/t and WACC of 12.8%. Key risks to our view are weaker coal price and production shortfall.

 

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