Indonesian Coal Mining Companies in Focus: Adaro Energy
The recently rallying coal price is a major boost for leading Indonesian coal miner Adaro Energy. Mirae Asset Sekuritas noted in a new report that Adaro Energy is in a great position to book higher corporate earnings in the years ahead because the miner's structure (and subsidiaries) are highly integrated and therefore it can more-or-less control the costs and risks in each business stage.
The three growth engines of Adaro Energy that are estimated to secure long-term earnings for the miner are (1) coal mining, (2) mining and logistics services, and (3) power generation.
The miner controls concessions in Sumatra and Kalimantan with an estimated 1.1 billion tons of coal reserves, roughly 3.9 percent of Indonesia's total coal reserves. Most of Adaro Energy's coal constitutes low calorie coal between 4,000 and 5,000 kilo-calorie per gram. However, due to its ultra-low ash, NOx and sulphur content, this coal is considered less environment-unfriendly.
In December 2016 Indonesia's benchmark thermal coal price (Harga Batubara Acuan, or HBA) - a monthly price that is set by Indonesia's Energy and Mineral Resources Ministry, and which is based on domestic and international coal indices - was set at USD $101.69 per metric ton, its highest level since May 2012. Whether there is more room for upward movement of the coal price in 2017 is unsure and is largely dependent on policies in China. If China decides to boost coal production, prices could collapse again. This uncertain factor has a big impact on the company's corporate earnings and the coal price should therefore be carefully followed by those who invest in shares of Adaro Energy.
However, in order to reduce its dependence on coal sales, Adaro Energy has expanded into the power sector. It is currently developing the 2 GW coal-fired Batang power plant in Central Java. This USD $4.2 billion plant will be connected to the Java-Bali power grid and state utility firm Perusahaan Listrik Negara (PLN) will purchase the electricity that is generated by the plant under a 25-year power purchase agreement. After this period, ownership will be transferred to PLN (under the so-called "build, operate, own and transfer" scheme).
Bhimasena Power Indonesia (BPI) constructs - and will operate - the Batang power plant. BPI is a joint venture (JV) created by Adaro Energy (34 percent stake), and Japan’s Itochu Corporation (32 percent stake) and Electric Power Development Co. Ltd., known as J-Power (also a 34 percent stake). Besides the Batang power plant, the consortium also plans to construct three other plants in Indonesia.
This power plant is coal-fired and will consume about 7 million tons of coal per year after it commences operations (scheduled for 2020). All this coal will be delivered by Adaro Energy. In 2017 Adaro Energy is expected to produce 54.5 million tons of coal. After the Batang plan starts operating, Adaro Energy's coal production is expected to rise to 91 million tons in 2021.
Future Projection Adaro Energy's Financial Highlights:
| 2014 | 2015 | 2016F | 2017F | 2018F | |
| Net Revenue | 3,325 | 2,684 | 2,517 | 3,066 | 3,773 |
| Net Profit | 178 | 152 | 133 | 180 | 264 |
| P/E Ratio (x) | 15.6 | 9.8 | 30.3 | 22.2 | 15.1 |
| ROE (%) | 5.5 | 4.5 | 3.8 | 4.9 | 6.8 |
in million USD, unless otherwise stated
Source: Mirae Asset Sekuritas (17/01/2017)
Mirae Asset Sekuritas advises investors to purchase Adaro Energy's stocks as it set its target price for the miner's shares at IDR 2,275 a piece. On Tuesday's trading day (17/01) shares of Adaro Energy did not change. However, over the past 12 months the miner's shares have surged a whopping 268.76 percent to IDR 1,700 per piece.
Stock Quote Adaro Energy - ADRO: