Indonesian Coal Mining Companies in Focus: Adaro Energy
Amid rising mining commodity prices, Indonesian coal mining company Adaro Energy saw its share price surge at the start of 2018. The mining index is actually the best-performing index so far this year in Indonesia, rising 13.58 percent since the start of the year. Being a mining company - or more precisely an energy company (as it recently entered the power generation sector) - Adaro Energy is among the major beneficiaries.
With a market capitalization of IDR 71.33 trillion (approx. USD $5.3 billion), energy company Adaro Energy contributes a whopping 32 percent to the mining index (which consists of all mining companies that are listed on the Indonesia Stock Exchange), revealing the significant role of Adaro Energy within this index.
So far this year, shares of Adaro Energy have risen 17.74 percent to IDR 2,190 per piece, reflecting a price-to-earnings ratio (PER) of around 10.7 times. Seeing the strengthening trend of commodity prices, most notably crude oil and coal prices, investors have become optimistic about the corporate earnings of mining companies in Indonesia.
In fact, JP Morgan is very enthusiastic about the potential of Adaro Energy shares in 2018. The American multinational banking and financial services set its share price target for Adaro Energy at IDR 2,700 a piece (reflecting a PER of 9.7 times), implying it sees plenty room for further growth of the miner's shares.
Several factors contribute to this optimistic view. Firstly, coal prices are estimated to continue climbing in the first quarter of 2018 amid high demand (due to the winter season) and supply disruptions (due to heavy rainfall in Indonesia and Australia). The ICE NewCastle Coal Index is estimated to remain above USD $100 per metric ton in this period. However, in the remainder of the year, the coal price is estimated to decline towards USD $85 per metric ton as coal production in China may rise, while coal imports into India are being curtailed.
Secondly, Adaro Energy has ample coal reserves with its coal mining assets in South Kalimantan, South Sumatra, Central Kalimantan, and East Kalimantan. Thirdly, the company is reducing its reliance on coal for the company's sales by entering other sectors, most notably the power generation sector. In the 2019-2020 period Adaro Energy will complete the development of 810 MW capacity in power plants (including the Batang power plant in Central Java). After these power plants become fully operational, up to 15 percent of the company's earnings will stem from power generation.
Stock Quote Adaro Energy - ADRO:
In 2018 Adaro Energy's sales are estimated to rise to USD $3.80 billion, from an estimated USD $3.46 billion in the preceding year. Regarding the company's coal mining activities, coal production is estimated to rise to 54 million tons in full-year 2018, from an estimated 52 million tons in 2017 in line with improving weather conditions.
Projection Adaro Energy's Future Corporate Earnings:
| 2016 | 2017F | 2018F | 2019F | |
| Net Revenue | 2,524 | 3,303 | 3,371 | 3,374 |
| EBITDA | 869 | 1,361 | 1,313 | 1,275 |
| Net Profit | 335 | 499 | 474 | 456 |
| P/E Ratio (x) | 12.7 | 8.5 | 8.9 | 9.3 |
in million USD, unless otherwise stated
Source: Danareksa Sekuritas (16/01/2018)