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PT Adaro Energy Indonesia TBK (ADRO)

1) A&R Investama recommends buying shares of PT Adaro Energy Tbk (ADRO), an Indonesian coal mining company, with a target price of Rp1445 per share, a 27% upside. 2) ADRO is well-positioned to benefit from recovering demand for thermal and metallurgical coal from Southeast Asia as economic activity rebounds. 3) Strong profitability is expected to continue, supporting higher returns for shareholders through increased dividends. Healthy financial ratios and a robust capital structure provide downside protection.
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0% found this document useful (0 votes)
174 views15 pages

PT Adaro Energy Indonesia TBK (ADRO)

1) A&R Investama recommends buying shares of PT Adaro Energy Tbk (ADRO), an Indonesian coal mining company, with a target price of Rp1445 per share, a 27% upside. 2) ADRO is well-positioned to benefit from recovering demand for thermal and metallurgical coal from Southeast Asia as economic activity rebounds. 3) Strong profitability is expected to continue, supporting higher returns for shareholders through increased dividends. Healthy financial ratios and a robust capital structure provide downside protection.
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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A&R Investama PT ADARO ENERGY TBK

Limited Publications Indonesia Stock Exchange (IDX)

Ticker: ADRO.JK Date: 11/06/20


Mining Sector Recommendation: BUY (28% upside)
Current Price: Rp 1140 as of 11/06/20 Target Price: Rp 1445

Market Snapshot ADRO: Advancing Growth Through Empowerment and Synergy


Ticker ADRO.JK
We issue a Buy Recommendation on PT Adaro Energy Tbk (ADRO) with a DCF-based price target of
Shares Outstanding (Mn) 31.985 IDR 1445/share, presenting an increase of 27%. In our view ADRO has an advantage due to the high
Market Cap (Rp mn) 36.463 development of power plants in Southeast Asia which has resulted in high demand for thermal coal ADRO
Market Cap (USD mn) 2.532 which also has the advantage of being more environmentally friendly "Envirocoal" and as economic activity
recovers, the need for metallurgical coal as the main raw material for steel production is getting better.
Adj 52 Week Low
610 We estimate a strong five year EPS CAGR of 4% 2019A-2024F. Our target price reflects a P/E of 6.48x
(IDR sh)
2021F, which is set under ADRO's historical valuations of 7.12x P/E (Average 2016A-2020E).
Adj 52 Week High
1715 Faster Recovery As Economic Activity Increases
(IDR sh)
Covid-19 has caused economies in several countries to stall due to lockdowns. We believe that ADRO's
Free Float (%) 49,91%
revenue in 2021F will be US$ 2508mn or increase 24% (YoY) after a decrease in 2020E (Revenue US$ 1982
Ev/Revenue (x) 36,62 mn). This demand is dominated by the Southeast Asian market, especially Vietnam and Thailand. We also
Ev/Ebitda (x) 11,10 estimate that the ICE Newcastle 2020E reference coal price is US$ 65.00/mt down 1.68% (YoY) and in
Source: Bloomberg 2021F according to the world bank and Thomas Research is estimated at US$ 68.00/mt or an increase of
5,50% (YoY). Southeast Asia Manufacturing Purchasing manager's index (PMI) data for September 2020
RELATIVE SHARE PRICE reflecting industrial activity, on average starting to increase compared to the previous quarter. Although the
PERFORMANCE average increase is still less than 50.In Q1-2021F it is estimated that Trading Economics will increase by
10000 51.33 on average and in Q2-2021 it is estimated that it will increase to 52.67.
8000 Strong Profitability Provides Quality Returns To Shareholders
6000 We hope that the recovery of domestic and global coal demand will increase ADRO's profitability (12.58%
4000 NPM 2019A to 19.24% 2024F), which we estimate will increase ROE 2021F by 11.21%. We estimate that
2000 ADRO will continue to pursue organic growth efforts from the current level of reserves. We also estimate that
product diversification and increase reserves will be the focus of ADRO in addition to continuing to integrate
0
and increase revenue from non-coal mining businesses. The growth of the non-coal business 2019A-2024F
2015
2016
2016
2016
2016
2017
2017
2017
2018
2018
2018
2018
2019
2019
2019
2019
2020
2020
2020

CAGR of 4.92% can support the coal business in the future. Along with increasing profitability, we hope that
ADRO Jakarta Composite Index
the dividend yield and dividend ratio will also be boosted (DPR 34.49% 2019A to 40.91% 2024F and DY
Source: Yahoo Finance
6.06% 2019A to 8.74% 2024A) so that they can provide the best return for shareholders.
PRICE EARNING RATIO ADRO
Healthy financial statements in line with a strong capital structure
We hope that ADRO can book an ROE of 12.42% and ROA of 6.32% in 2021F as revenue starts to increase
30
25
due to weak demand for coal due to Covid-19. We also project EPS growth (2020E US$ 0.0064, 2021F
20 US$ 0.0122) with a CAGR growth of 4%. We believe that ADRO can also maintain its capital structure by
15 maintaining debt to equity ratio (18.81% 2029A to 77.59% 2021F) and debt to asset ratio (44.81% 2019A to
10 43.69% 2021F).
5
Strategic position for the export market and metallurgy as the main raw material for steel
0
-5 We believe that ADRO's export market will expand more widely because it has the advantage of a strategic
mining location. ADRO's coal mines located in Sumatra, Kalimantan and Australia can provide a growing
EPS Stdev-1 Stdev +1 market. Metallurgical coal assets in Indonesia and Australia are of high quality in the seaborn coal market.
Avg Stdev-2 Stdev +2 In addition, we also predict ADRO metallurgical coal, which is the main raw material for steel production,
Source: Analyst Estimate will increase. We estimate that China and India will be the drivers of demand for metallurgical coal.
Prospective ADRO future revenue generated from Envirocoal and business diversification
PRICE BOOK VALUE RATIO ADRO The main product of ADRO’s coal is Envirocoal, a type of thermal coal which has very low levels of sulfur,
1,60 ash and nitrogen. The risk of an existing campaign to reduce pollution in many countries may be somewhat
1,40
avoided by ADRO. Envirocoal provides economic and technical benefits to customers due to lower pollutant
1,20
1,00 levels and to lower operating costs. Apart from Envirocoal, ADRO's business diversification and innovation
0,80
are also an advantage over its competitors. As a result, diversification will make Adaro Energy's revenue
0,60
0,40 more stable. Adaro Energy has 8 business pillars, namely Adaro Mining, Adaro Services, Adaro Logistics,
0,20
Adaro Power, Adaro Land, Adaro Water, Adaro Capital and Adaro Foundation.
0,00

Key Financials 2017A 2018A 2019A 2020E 2021F 2022F 2023F 2024F
PBV Stdev-1 Stdev +1
Revenue (US$ mn) 3258,33 3619,75 3457,15 1982,15 2508,82 2490,89 2592,36 2740,61
Avg Stdev-2 Stdev +2
Source: Analyst Estimate EBITDA Margin (%) 38,82 32,46 30,31 27,85 35,43 39,41 33,84 40,53
Net Profit Margin (%) 16,46 13,19 12,58 10,36 15,57 18,49 14,32 19,24
ROE (%) 7,87 6,76 6,03 3,94 6,32 7,08 5,81 7,74
P/E (x) 4,72 5,30 5,82 12,32 6,48 5,50 6,82 4,80
Debt To Equity Ratio (%) 66,54 64,10 81,18 85,41 77,59 66,55 64,31 63,95
Dividen Payout Ratio (%) 46,63 41,93 34,49 39,41 40,41 43,41 45,01 40,91
Source: Analyst Estimate
Business Description
FIGURE 1: GEOGRAPHIC PT Adaro Energy Tbk (IDX: ADRO) is a vertically integrated energy company in Indonesia with
SALES BREAKDOWN 2019A businesses in the coal, energy, utilities and supporting infrastructure sectors. Established on August 26, 2004.
ADRO main product is Envirocoal, a thermal coal product which has low levels of sulfur, ash and11/06/20
Date: nitrogen.
2% The main mine site is in South Kalimantan. ADRO in 2019 was recorded as having coal reserves of the same
Recommendation: BUY (28% upside)
12% size, ADRO also has metallurgical coal assets such as semi-soft coking coal and premium hard coking coal in
Target Price: Rp 1445
Indonesia and Australia. The biggest export destinations for ADRO are Southeast Asia, East Asia, India,
15% 42%
China and others (Figure 1).
Adaro Mining is the main business of the Adaro Group, which focuses on coal mining in Indonesia and
29% Australia. ADRO subsidiaries produce sub - bituminous thermal coal which can be used for power generation
and hard coking coal which is an important component in steel production. Adaro Mining produces coal with
CV ranging from 4000 kcal/kg - 5000 kcal/kg with coal resources and reserves of 8.1 billion tonnes and
Southeast Asia East Asia 1.4 billion tonnes. Adaro mining consists of PT Adaro Indonesia, Balangan coal companies, Adaro Metcoal
India China companies, PT Mustika Indah Indah and PT Bukit Enim Energi, Kestrel coal resources and PT Bhakti Energi
Others (Europe,New Zealand, Pakistan) Persada.
Source: Company Data Adaro Services is a subsidiary of ADRO that focuses on providing quality support services to the mining
industry from exploration, engineering and engineering, to contract mining and marketing and trading. Adaro
Services serves the ADRO group mining companies and third parties. Adaro Services consists of
FIGURE 2: ADRO
PT Saptaindra Benar and PT Adaro jasabara Indonesia.
SHAREHOLDERS
Adaro Logistics managing a number of companies oper ating to strengthen the gr oup supply chain from
mining to power generation. Adaro logistics activities include barging and loading coal into ship, dredging
and maintenance of river channels loading and unloading services to shipyard. Adaro Logistics consists of
PT Maritim Barito Perkasa, PT Harapan Bahtera Internusa, PT Indonesia Multi-Purpose Terminal,
PT Indonesia Bulk Terminal, PT Sarana Daya Mandiri, PT Puradika loading and unloading Makmur and
Barito Galangan Nusantara.
Adaro Power is engaged in steam power gener ation or PLTU as a diversification of ADRO business.
Adaro Power consists of PT Makmur Sejahterah Wisesa, PT Tanjung Power Indonesia and PT Bhimasena
Power Indonesia.
Adaro Land is a str ategic company in the ar eas of land assets and infr astructur e. Adar o Land thr ough
PT Adaro Strategic Investment PT Adaro Persada Mandiri has six business segments, namely land management services, land management,
Garibaldi Thohir land and property asset management, infrastructure development, agribusiness management, management of
Public land assets for plantations, land reclamation and forestry rehabilitation.
Source: Company Data
Adaro Water is engaged in clean water treatment. Adar o water thr ough PT Adar o Tirta Mandir i aims
to provide drinking water, distribution channels, wastewater management services and water solution services
FIGURE 3: BOARD
under cooperation contracts with local governments.
COMMISSIONERS AND
DIRECTORS SHAREHOLDING Adaro capital plays a r ole in maximizing financial potential and the gr oup extensive networ k to seize
investment opportunities. profitable and will generate significant returns for shareholders.
Name %
Adaro Foundation task is to coordinate corporate social responsibility (CSR) programs under one foundation
Edwin Soeryadjaya 3,29 "Yayasan Adaro Bangun Negeri".
Theodore Permadi Rachmat 2,26
Arini Saraswaty Subianto 0,04
Corporate Governance
Garibaldi Thohir 6,18 Shareholder Structure PT Adar o Ener gy Tbk shareholder s consist of PT Adar o Str ategic Investment
at 43,91%, Garibaldi Thohir at 6,18% and the Public at 49,91% (Figure 2). Ownership of the Board of
Chiristian Ariano Rachmat 0,06
Commissioners and Directors of which Edwin Soeryadjaya is 3,29%, Theodore Permadi Rachmat 2,26%,
Chia Ah Hoo 0,03 Arini Saraswaty Subianto 0.04%, Garibaldi Thohir 6.18%, Christian Ariano Rachmat 0,06%, Chian Ah Hoo
Julius Aslan 0,05 0,03% and Julius Aslan 0,05% (Figure 3). The total composition of shareholders is 20,28% retail, corporate at
Source: Company Data
59,52%, pension funds, foundations and co-operatives, respectively 0,52%, 0,10% and 0,04%. Meanwhile,
the total composition of Foreign shareholders is retail at 0,05% and corporation at 19,49% (Figure 4).
FIGURE 4: TOTAL Corporate Management profile management has excellent skills and experience. Garibaldi Thohir or Boy
SHAREHOLDERS COMPOSITION Thohir, President director and Chief Executive Officer. Mr. Garibaldi Thohir has served as President Director
Type since 2008. He is the founder of PT Wahana Ottomitra Multiartha and concurrently serves as President
commissioner and president director in several coal mining companies in Indonesia. Under his leadership,
Domestic % ADRO became an expansive, vertically integrated and innovative coal company by diversifying its non-coal
Retail 20,28 business. One of the expansionary actions carried out by ADRO in 2018 was the acquisition of the Rio Tinto
Corporation 59,52 mine in Australia.
Corporate Governance ADRO has a Boar d of Dir ector s consisting of 5 member s of the boar d of
Pension Fund 0,52
directors and 5 members of the commissioners, of which 2 out of 5 commissioners are independent
Foundation 0,10 commissioners. ADRO has met the terms and conditions of the Indonesia Stock Exchange, namely having
Co-operative 0,04 a minimum of 30% independent commissioners and ADRO owning 40%. The Audit Committee consists of 3
Subtotal 80,46 members, namely one independent commissioner as chairman and two experts in accounting and law. ADRO
is owned by several family of entrepreneurs but none of them have full control over the company. GCG
Foreign %
implementation is also based on the ASEAN CG scorecard parameters.
Retail 0,05 Social Responsibility ADRO does not r educe its commitment to br ing positive changes to the
Corporation 19,49 environment in the operating place. Through its subsidiary, the Adaro Foundation, ADRO has several
Subtotal 19,54 ongoing CSR programs. ADRO created a program "ADARO turns on change" which consists of Adaro
turning on knowledge, Adaro turning on prosperity, Adaro turning on the body, Adaro turning on culture and
Total Public 100,00
Adaro turning on sustainability. In 2019, ADRO spent US$ 1,4 million through its subsidiary for CSR
Source: Company Data activities, up from US$ 3,8 million or 7,8% (YoY).
Industri Overview & Competitive Positioning
The coal industry is an industry that is cyclical and vulnerable to government policies or economic conditions.
At the end of 2019, the ICE Newcastle coal price fell to US$ 66.10/mt or 34.62% (YoY). The prolonged trade
war and the Covid-19 Pandemic in 2Q20 also made coal demand decrease due to the cessation of economic
Date: 11/06/20
activity. DMO coal is also projected to only absorb 125 million tons of the 2020 DMO target
Recommendation: BUY (28% of 155upside)
million
tons. Target Price: Rp 1445
FIGURE 5: GDP THAILAND, VIETNAM Macroeconomics
AND THAILAND (2017A-2021F)
One of the key drivers of the coal industry is the reference coal price. In 2019, ICE Newcastle benchmark
coal price was US$ 66.10/mt or decreased by 34.62% (YoY). The main cause of the decline in reference
prices was an economic slowdown due to the prolonged trade war between the USA and China which made
China limit coal import activities. China manufacturing industry, which previously contributed 70% of
electricity demand, experienced a decline due to slowing activity in the manufacturing industry, reflected in
China Gross Domestic Product (GDP) in 2019, which was 6.10%, down by 0.60% (YoY). The coal market to
the European continent will also decline due to the conversion of environmentally friendly energy.
In addition, the Covid-19 pandemic that occurred in 1Q20 was the cause of the decline in coal demand due to
Thailand Indonesia Vietnam
the cessation of economic and industrial activity due to lockdowns in affected countries. Some of the world
Source: World Bank, PWC Forecast
main export destination countries, such as China and India, experienced slowing economic growth. In 1Q20,
China GDP was -9.1% and India in 1Q was 3.1%. But in 2Q20 it was -23.9% down by 27% (QoQ). However,
FIGURE 6: WORLD COAL PRODUCTION coal exports to several countries such as China, India, Vietnam and especially other Southeast Asian countries
2019A (in Million Ton)
are still experiencing increased demand due to high demand for electricity and the incessant construction of
PLTU in Southeast Asia. Import demand for Southeast Asian countries is 132 million tons or an increase of
26 million tons (YoY).
Purchasing Managers Index (PMI) And Gross Domestic Product (GDP)
Manufacturing in the largest coal importing countries such as Vietnam and Thailand in 2020 experienced
improvements. In 3Q20, the Vietnam and Thailand Manufacturing PMI was 48,50, increasing by 13,99% and
17,70% (QoQ), respectively. In 4Q20, the PMI is projected at the level of 50,50 so that it can restore coal
demand for power generation. In 2021F, the annual GDP growth of Southeast Asia's main coal importer
countries namely Vietnam and Thailand is expected to increase by 4.1% and 6.8% (Figure 5).
Indonesian Economy
Based on data from the world bank, Indonesia is a country with a GDP in the 16th place in the world of
China USA US$ 1.119.190 million and is a member of the G20 or group of 19 countries with large economies in the
India Indonesia world plus the European Union. In 2Q20, Indonesia economic growth contracted by 4,19% (QoQ). However,
Australia Russia
Europa Union
in 2021 the world bank projects Indonesia economy to grow by 4,8% (YoY) (Figure x). Indonesia is one of
Source: International Energy Agency the largest coal producer and exporters in the world. Since 2005, when it surpassed Australian production,
Indonesia became a leading exporter of thermal coal. A significant portion of the exported Thermal coal
FIGURE 7: DOMESTIC MARKET consists of medium quality types (between 5100 cal/gram and 6100 cal/gram) and low quality types (below
OBLIGATION COMPOSITION 2020E (in 5100 cal/gram) with the majority of demand coming from China and India. Indonesia is the 4th largest coal
Million Ton)
producer in the world with a total production of 610 million tons after China, the United States and India
(Figure 6)
Domestic market obligation (DMO)
Coal is a policy made by the Indonesian government to supply domestic coal needs and especially for the
needs of PLTU at 70,41% (Figure 7) with Reference Coal Prices (HBA) in 2Q20 being US$ 52,98/mt (Figure
x). Target DMO coal in 2020 is 155 million tonnes. In 2Q20, realized DMO was 63,21 million tons or
40,78% of the target. We project that by the end of 2020 the DMO will only be absorbed 125 million tons.

Competitive Positioning
Different products: Envirocoal
The company main product is Envirocoal, which is a type of coal which has very low levels of sulfur, ash and
nitrogen. Envirocoal provides economic and technical benefits to customers because low pollutant levels
Power Plants Cement
allow them to meet the stringent emission standards in their country and to lower operating costs. Envirocoal
Processing Needs Textile Factory
Paper Factory Fertilizer Factory
very low ash content reduces ash removal costs and a very low sulfur content thereby, helping to reduce
Source: Ministry of Energy and Mineral Resources dependence on high-cost desulphurisers.
Solid financial fundamentals
FIGURE 8: ADRO DEBT/EBITDA RATIO ADRO solid financial profile is also one of the advantages of competing companies. In 2019, the company
2019A-2024F managed to score a net profit of US$ 435 million, with a Return of Equity (ROE) and Return of Assets (ROA)
ratio of 10,92% and 6,03%, respectively. The company total assets also increased by 2,17% (YoY).
The company capital structure was also maintained with a Debt/EBITDA ratio of 3.09x, an increase of
27.37% (YoY) (Figure 8). The company liquidity also improved where ADRO cash and cash equivalents
increased 53% (YoY) to US$ 1576 million. ADRO in 2019 issued bonds worth US$ 750 million and has a
five-year tenor that extends the loan maturity and diversifies the company funding sources. Its strong capital
structure and financial position have enabled ADRO to cope with the volatility of the coal industry.
Sustainable development
ADRO has several projects that are environmentally friendly, such as biodiesel facilities, water treatment
ADRO Debt/Ebitda Ratio (x) facilities, ultra super critical PLTU, and renewable energy power plants. ADRO also participates in water
Moving Average Debt/ Ebitda Ratio treatment projects throughout Indonesia to create value for the ADRO group, local communities and the
Source: Analyst Estimate country.
Diversification Business
ADRO advantage over competitors is the company business model that is diversified into the non-coal
business. The company business model includes eight business pillars and each business pillar continues to
develop itself. ADRO non-coal diversification business can provide more stable income and can offset coal
business revenue. In addition to the non-coal business, ADRO strong integrated business Date: 11/06/20
model is an
Recommendation:
advantage over competitors. ADRO has coal mining, services, logistics BUY
and steam power (28% upside)
generation (PLTU)
businesses (figure 9). Target Price: Rp 1445
FIGURE 9: ADARO ENERGY CORPORATE STRUCTURE

ADARO MINING ADARO SERVICES ADARO LOGISTICS ADARO LOGISTICS

 AI (88,5%)  SIS (100%)  MBP (100%)  MSW (100%)


 BGC (75%)  AEI (100%)  SDM (51,2%)  BPI (34%)
 MIP (75%)  AMT (100%)  IMPT (85%)  TPI (65%)
 BEE (61%)  IBT (100%)
 AMC (100%)
 BEP (10,2%)
 KCR (48%)
Source: Company Data

Diverse Asset
ADRO product portfolio ranges from sub-bituminous thermal coal used for power generation to premium
hard coking coal, which is an important and indispensable component of the steel production process.
The location of ADRO coal assets is very strategic, located in Indonesia and Australia, which are the main
coal producing countries and provide ADRO access to major coal importers in the Asia Pacific region. ADRO
coal reserves and resources are 1,4 billion tonnes and 8,1 billion tonnes, respectively (Figure 10).

FIGURE 10: COAL RESOURCES AND RESERVES ADRO 2019A (in Million Ton)

ADRO Coal Resources ADRO Coal Reserves


Source: Company Data

Competition Analysis
FIGURE 11: MARKET SHARE
PTBA
PT Bukit Asam Tbk (PTBA) is a coal mining company with the majority shareholder being PT Indonesia
Asahan Aluminum (Persero). The product produced by PTBA is coal with low quality (<5100 kcal/kg) to
high (>6100 kcal/kg) consisting of BA50, BA48, GAR4800-IPC, BA45, GAR6100 and others. In 2019,
PTBA generated revenue of IDR 21,7 trillion or an increase of 2,93% (YoY) and has a market share of 12%
with an ROA of 15,54% and ROE of 22,02%. PTBA has total assets of IDR 26,098 million and total equity of
IDR 18,422 million.
ITMG
PT Indo Tambangraya Megah Tbk (ITMG) is a coal mining company located in Kalimantan. The type of coal
product that ITMG produces is coal with calories between 5000 kcal/kg to 6000 kcal/kg. Products are
ADRO PTBA BUMI marketed to Indonesia and exported to Asia, Europe and the Pacific region. The majority shareholder of
BYAN ITMG HRUM ITMG is Banpu Minerals Private Limited (Singapore) at 65,14%. ITMG has 2019 revenue of US$ 1715
INDY million and has a market share of 14%. ITMG is recorded to have total assets and equity of US$ 1209 million
Source: Analyst Estimate and US$ 884 million, respectively, with an ROA of 11% and ROE of 15%.
FIGURE 12: NEWCASTLE COAL HRUM
PRICE 2019A-2024F
PT Harum Eenergy Tbk (HRUM) is a coal mining company that has mining locations in Kutai Kartanegara
Regency, Samarinda City and North Barito Regency, Central Kalimantan. The controlling shareholder is
PT Karunia Bara Perkasa at 79,79%. The type of coal produced by HRUM is non-agglomerated coal having a
gross calorific value greater than 5700 kcal/kg on an ash-free GAD basis or about 5400 kcal/kgDate:on11/06/20
a GAR
basis. HRUM revenue in 2019 was US$ 262 million and had a market Recommendation:
share of 2% with BUY
an ROA (28% upside)
of 4,1% and
ROE of 5,9%. HRUM has total assets and equity of US$ 447 million and US$ 399 million, Targetrespectively.
Price: Rp 1445
BYAN
PT Bayan Resources Tbk (BYAN) is a coal mining company that has environmentally friendly coal products
ICE Newcastle Coal Price
that are managed in an integrated manner. BYAN produces several types of coal, including sub-bituminous to
Source: World Bank , Thomas Research bituminous. BYAN majority shareholder is Dato 'DR Low Tuck Kwong at 53,96%. In 2019, BYAN
generated revenues of US$ 1,391 million or decreased by 18,64% (YoY) and has a market share of 11% with
FIGURE 13: WORLD STEEL an ROE of 37,83% and ROA of 18,33%
PRODUCTION 2018A-2021F
BUMI
1900
1869
1850
PT Bumi Resources Tbk is a mining company the largest coal in Indonesia. BUMI has coal mining
1808
1800 subsidiaries, namely KPC and Arutmin, which are located in Kalimantan. The types of products produced by
1750
1717
BUMI are 5100 kcal/kg to 6000 kcal/kg). BUMI revenue in 2019 is US$ 1112 with total assets and equity of
1700 US$3702 million and US$ 509 million. BUMI has a market share of 9% with an ROA of 0,3% and ROE of
1654
1650 1,9%.
1600
INDY
1550

1500
PT Indika Energy Tbk (INDY) is a leading integrated energy company in Indonesia. The company business
2018 2019 2020F 2021F portfolio includes the energy resources sector, energy services and energy infrastructure as well as a number
World Steel Production of non-energy businesses. INDY has 2 mining companies, PT Kideco Jaya Agung and PT Multi Tambang
Linear World Steel Jaya Utama. INDY coal products are low calorie coal. INDY has 23% market share with ROA 8,0% and ROE
Source: World Steel
27.7%. INDY revenue in 2019 decreased 6.27% (YoY) by US$ 2,782 million.

FIGURE 14: TOP 5 STEEL USING


COUNTRY 2019A-2021F
Investment Summary
Investment Thesis
We recommend Buy at ADRO with a 12 month target price of Rp 1445 and represent a total return of 28%
from the closing price of Rp. 1140 in 11/06/20. We evaluate ADRO using the Discounted Cash Flow (DCF)
method and relative valuation.
Potential Key Drivers
Coal Prices
Coal prices greatly affect ADRO coal business. In 2019, the ICE Newcastle reference coal price was
2019A 2020E 2021F US$ 66,10/mt or decreased 34,62% (YoY). According to the world bank, in 2020 it is estimated to be
Source: World Steel US$ 65,00/mt or decrease 1,68% (YoY) (Figure 12). However, it is still better than 2Q20 at US$ 57,40/mt.
The decline was caused by several factors, including the state policy implementing a lockdown to prevent the
FIGURE 15: DEBT TO EQUITY RATIO transmission of Covid-19 so that economic activity stopped and demand for electricity decreased which led to
(2019A - 2024F)
increased supply in the market.
Having a strategic position to supply the export market
We believe that ADRO strategic mining position which is located in Sumatra, Kalimantan and Australia can
provide a strong geographical advantage to accommodate these developing markets. Both ADRO
metallurgical coal assets in Indonesia and Australia are the highest quality coal preferred in the sea born coal
market.
Production and Consumption of Steel
One of ADRO coal products is hard coking coal which is the main raw material for steel production. In 1H20,
global steel production decreased due to Covid-19, causing demand for metallurgical coal to decline. The
Debt to Equity Ratio (%) long-term prospect of metallurgical coal is predicted to remain strong in line with the growth in world steel
Moving Average Debt to Equity Ratio
production and consumption. China and India are expected to be the main demand drivers for metallurgical
Source: Analyst Estimate
coal (Figure 14).
FIGURE 16: EARNING PER SHARE Diversification and business development
(in US$) ADRO (2019A-2024F) ADRO continues to innovate by diversifying its business in both the coal and non-coal businesses. In 2019,
non-coal business revenues amounted to US$ 288,044 or an increase of 5,65%. The 2016A-2024F non-coal
business pillar revenue growth is 4,92% CAGR. Other business diversification that continues to be carried out
is by adding products, increasing reserves and selecting strategic locations. Diversification and non-coal
mining business development activities are participating in a power plant project in Central Java with a
capacity of 2x1000 MW which will be the first time in Indonesia to become a power plant using Ultra-Super
Critical technology which is more efficient and environmentally friendly.
Health Financials to Maximize Shareholder Returns
We estimate that ADRO will book an ROE of 12,42% in 2021F as economic activity recovers and demand
Earning Per Share (in US$)
Moving Average EPS
for coal for power generation. We also project EPS growth to improve (2020E US$ 0.0064, 2021F
Source: Analyst Estimate US$ 0.0122) with a CAGR growth of 4% (Figure 16). We also project the NPM to be higher from 12,58%
2019A to 15,57% 2021F. We also project financial leverage for Debt to Equity 2021F to remain stable at
85,94%, thus giving the company flexibility to maximize returns for shareholders by carrying out organic
expansion (Figure 15).
Valuation
We use DCF valuation and relative valuation as support to achieve our target price of IDR 1145 or an upside
of 28%. ADRO closing price is Rp. 1140 in November 2020.
Intrinsic Valuation: Discounted Cash Flow-Free Cash Flow To the Firm (DCF-FCFF)
We use this method because we have considered firm value in the valuation calculation by including the debt
value and equity value aspects of the company to determine fair value.
FIGURE 17: COST OF EQUITY Cost of Equity
Cost Of Equity We calculate the Cost of equity through the Capital asset pricing model. The calculation assumption is to use
the 10 year assumption of 8.50%. Our Risk Free Rate uses Indonesian bonds for 10 years. Beta calculation
Beta 1,32 uses ADRO return regression for 10 years of 1.32. The calculation of market return using the Natural
Risk Free 8,50% logarithm of the JCI return for 5 years is 12.77% (Figure 17).
Market Return 12,77% WACC
Market Risk Premium 4,27% WACC calculated by taking into account the debt aspect using the cost of debt and the market aspect using
the cost of equity, then the result is proportional to the amount of equity and the amount of debt owned by the
Cost Of Equity 14,12%
company. Then it is found that the proportion of debt is 31.21% and the proportion of equity is 68.79%.
Source: Analyst Estimate The result of the WACC calculation is 10.68%. A more detailed breakdown of our WACC assumption is
presented in the table below:
TABLE 1: WACC ASSUMPTION

ASSUMPTION RATE METHODOLOGY


Weighted of Debt 31,21% Divide weight of interest bearing liabilities with a total book value.
Weighted of Equity 68,79% Divide weight of total equity with a total book value.
Cost of Debt 3,12% Calculated by multiplaying the cost of debt before tax by (T-1).
Cost of Equity 14,12% Calculated via CAPM
WACC 10,68%
Source: Analyst Estimate

Relative Valuation
To support our valuation, we also use the Relative valuation method. Below we compare the Market Cap,
P/E, P/B, EV/EBITDA and ROE ratios between ADRO and its competitors which we selected based on
similar products and company sizes.
TABLE 2: RELATIVE VALUATION PEERS TABLE

MKT CAP
TICKER COMPANY P/E (x) P/B (x) EV/EBITDA (x) ROE (%)
(RP MN)
2020E 2021F 2020E 2021F 2020E 2021F 2020E 2021F
ADRO.JK PT Adaro Energy Tbk 36.463,99 12,32 6,48 0,90 0,73 68,80 43,42 7,31 11,21
PTBA.JK PT Bukit Asam Tbk 25.230,00 7,43 6,98 1,48 1,29 4,22 3,70 27,86 25,30
ITMG.JK PT Indo Tambangraya Megah Tbk 11.640,00 7,90 7,30 1,60 1,50 4,10 3,80 12,10 13,00
HRUM.JK PT Harum Energy Tbk 6.250,00 8,80 7,80 1,40 1,20 2,20 1,70 15,90 15,70
BYAN.JK PT Bayan Resources Tbk 49.000,00 24,00 20,00 6,03 4,57 7,80 7,50 25,13 26,20
INDY.JK PT Indika Energy Tbk 6.040,00 4,40 3,32 0,84 1,15 9,50 8,80 1,70 1,80
BUMI.JK PT Bumi Resources Tbk 3.480,00 -1,76 -0,50 -0,87 -0,30 3,30 4,56 49,87 40,00
BSSR.JK PT Baramulti Sukses Sarana Tbk 3.740,00 9,53 9,30 1,70 1,66 7,50 7,23 17,80 18,00
MBAP.JK PT Mitrabara Adiperdana Tbk 2.850,00 6,86 6,78 1,71 1,59 3,20 3,15 24,96 25,21
Source: Analyst Estimate

Financial Analysis
FIGURE 18: ADRO REVENUE Strong revenue supported by export and non-coal segment
BREAKDOWN (in US$ MN)
(2019A-2024F) ADRO revenue is divided into two segments, namely the coal segment and the non-coal segment.
The composition of revenue for the 3Q20 coal segment was 92.61% and the non-coal segment was 7.98%.
ADRO revenue growth 1,08% 2016A-2024F CAGR. Revenue Growth is driven by the production of the
national coal industry and Indonesia GDP. We estimate that in 2020E export revenue will decrease 79.65%
to US$ 1149 million. However, we estimate 2021F export revenue will increase 34.66% (YoY)
to US$ 1625 million as demand recovers. Non-coal segment revenue in 2Q20 amounted to US$ 100,684
thousand. We estimate that in 2020E it will be US$ 233,778 thousand and in 2021F it will be US$ 254,236
Coal Segment revenue
thousand with a growth of 4.92% 2019A-2024F CAGR (Figure 18).
Non-Coal Segment revenue DuPont Analysis - Drivers of Profitability
Moving Average Coal Segment Revenue
Moving Average Non-Coal Segment Revenue In the period analyzed, ADRO had a fairly good return on equity (ROE 2020E 7.31%, ROE 2024F 11.21%).
Source: Analyst Estimate
Previously, the main drivers such as the high level of profitability, especially the net profit margin, as well as
FIGURE 19: DUPONT ANALYSIS the total asset turnover. We estimate that ROE in 2020E will experience a decline (ROE 2020E 7.31%, ROE
(2020E - 2024F)
2021F 11.21%) due to weak net income and income. DuPont analysis suggests the most important driver for
LEGEND ROE
maintaining future returns on equity to be financial leverage, calculated as the ratio of assets divided by
2020E 2024F 7,31% 12,70%
equity. Therefore, we conclude the expected increase in the Company's leverage and asset turnover, which
Date: 11/06/20
ROA ASSET/EQUITY suggests that better utilization of the Company's resources has aRecommendation:
positive effect on BUY
profitability. For an
(28% upside)
7,31% 12,70% 185% 164% extended DuPont analysis see (figure 19). Target Price: Rp 1445
Solid profitability provides quality returns for shareholders
NI/SALES SALES/ASSETS
10,36% 19,42% 38,03% 40,25% We expect ADRO to generate strong EPS growth of 4% 2019A-2024F CAGR while continuing to grow its
Source: Analyst Estimates net profit margin (from 12.58% 2019A to 19.24% 2024F). We believe that ADRO initiative, developing its
FIGURE 20: AVERAGE SELLING coal non-business pillar will increase operational efficiency and drive future net margin expansion, which in
PRODUCT ADRO (in US$ MT)
(2019E - 2024F)
turn will result in a superior average ROE of 10.58% 2019A-20224F. We also expect the dividend payout
80,00 ratio and dividend yield to increase (DPR 34.49% 2019A to 40.91% 2024F and DY 6.06% 2019A to 8.74%
70,00 66,10 65,00
68,00 67,10 66,10 65,20 2024A) so that they are attractive to shareholders (Figure 22 & 23).
60,00 56,02 55,12
53,32 53,02 54,12 53,22
50,00 Average Selling Product began to recover
ASP (Average Selling Product) in 2020E amounted to US$ 53.02/mt or decreased 0.56% (YoY). We believe
40,00

30,00

20,00 that in 2021F, ASP is estimated to be US$ 56.20/mt or an increase of 5.50% (YoY) as electricity demand and
10,00
coal prices recover (Figure 20). We take world bank data, in 2021F the coal price is estimated at US$ 68.00
-
2019A 2020E 2021F 2022F 2023F 2024F
mt or an increase of 4.51% (YoY).
Average Selling Product ADRO (US$ MT)
ICE Newcastle Coal Price (US$ MT) Capital Expenditure increases along with expansion
Moving Average ASP ADRO
Due to the weakening condition of the coal industry, in 2020 we estimate ADRO capital expenditure of
Moving Average ICE Newcastle Coal Price
Source: Analyst Estimate
US$ 250,000 thousand. Capital expenditure will mainly be focused on routine maintenance, purchase and
replacement of heavy equipment, and development of ADRO Metcoal. We estimate that ADRO Capex will
FIGURE 21: CAPITAL EXPENDITURE
ADRO (in US$) increase to US$ 521,777 thousand or 74% (YoY) in line with the expansion that will be carried out and the
(2019A - 2024F) recovery of coal demand (Figure 21).
Capital Structure
Our analysis of ADRO capital structure is in the very healthy category. Reflected in the debt to equity ratio
which is still in a good category (DER 2020E 85.41%, DER 2021F 77.59%) with a healthy category ratio, the
company still has opportunities for expansion (Figure 15). Our forecast is that the debt will increase in 2021F
in line with the low FED Rate. Altman Z-score of almost 2,01, which is positive, as it is the z-score consid-
ered by investors when purchasing a stock (Appendix D).
Reported Earnings
Capital Expenditure (US$)
Annual audits have been conducted by Pwc, expressing that consolidated financials objectively present
Moving Average Capital Expenditure ADRO financial position. We performed the 8 variable Beneish M-score analysis for the last five year end
Source: Analyst Estimate financial statements to evaluate ADRO earnings quality. Based on the variables, the company has a low
likelihood of manipulating earnings. We notice an average of an M-score of -3.46 during the last five years,
FIGURE 22: DIVIDEND YIELD ADRO which is below the -2.22 indicator. The lower the indicator, the less likely is the firm to manipulate earnings
(2019A-2024F) results (Appendix E).
9,00% 8,52%
7,89%
8,00%
7,00% 6,23%
6,60%
Sensitivity Analysis
5,92%
6,00%
5,00%
Using a sensitivity analysis shows a change in sensitivity between WACC and Terminal Growth. This change
4,00% 3,20%
shows by simulating a change in WACC every 0.1% and a change in terminal growth of 0.2%. In the worst
3,00% case, with the largest WACC and the smallest terminal growth, the valuation results show an upside of 3.68%.
2,00%
Meanwhile, with the smallest WACC and the largest terminal growth, the valuation results showed an upside
1,00%
0,00%
of 59.12%.
2019 2020E 2021F 2022F 2023F 2024F
TABLE 3: SENSITIVITY ANALYSIS
Dividend Yield
Moving Average
Source: Analyst
WACC
FIGURE 23: DIVIDEN PAYOUT RATIO
10,48% 10,58% 10,68% 10,78% 10,88%
ADRO (2019A-2024F)
6,32% 59,12% 54,43% 49,96% 45,69% 41,61%
Terminal Growth

50,00%
45,01%
45,00%
40,00%
39,41% 40,41%
43,41% 40,91%
6,12% 49,96% 45,69% 41,61% 37,70% 33,96%
34,49%
35,00%
30,00% 5,92% 41,61% 37,70% 33,96% 30,37% 26,93%
25,00%
20,00%
15,00%
5,72% 33,96% 30,37% 26,93% 23,62% 20,44%
10,00%
5,00% 5,52% 26,93% 23,62% 20,44% 17,38% 14,44%
0,00%
2019 2020E 2021F 2022F 2023F 2024F

Dividen Payout
5,32% 20,44% 17,38% 14,44% 11,60% 8,87%
Moving Average
Source: Analyst Estimate
5,12% 14,44% 11,60% 8,87% 6,23% 3,68%
Source: Analyst Estimate
Investment Risk
FIGURE 24: ADRO INVESTMENT MR1: Market Risk: Foreign Exchange Risk
RISK MATRIX
Financing and most of the operating income and expenses of the operating subsidiary is denominated in
US Dollars, which is a natural hedge against foreign currency exposure. ADRO has exposure Date: to foreign
High

11/06/20
currency risk arising from dividend payments and other operation Recommendation:
costs in Rupiah. ADRO BUY (28% upside)a
has established
FR1 FR2 RR1 policy to manage foreign currency exchange rate risk against the functional currency of group companies.
Target Price: Rp 1445
MR2: Maket Risk: Price Risk
Medium
Impact

MR1 FR3 MR2


The company's operations are exposed to market risks related to fluctuations in commodity prices on the
BR1 RP1 MR3
world coal market. ADRO is exposed to price risk arising from investments in available-for-sale effects
which are recorded at fair value through profit or loss. The management of price risk arising from investing in
debt securities is carried out by analyzing the amount of coupons offered on bonds and the level of return that
Low

RI1
is generally expected by the market. In order to manage price risk arising from investments in securities that
Low Medium High are not traded on an exchange, the Group has diversified its portfolio. The investment performance available
Probability
for sale by the group is monitored periodically.
Source: Analyst Estimate
MR3: Market Risk: Interest Rate Risk
ADRO has interest rate risk arising from long-term loans denominated in US Dollars. The interest rate risk
from cash is insignificant and all other financial instruments are interest free. Loans issued at variable interest
rates expose ADRO to cash flow interest rate risk. ADRO manages this risk by swapping interest rates from
its loan portion to reduce the effect of changes in floating interest rates.
FR1: Financial Risk: Credit Risk
ADRO has credit risk from cash in banks, time deposits, financial assets available for sale, trade receivables,
other receivables, restricted time deposits, loans for related parties, other current assets and other non-current
assets. ADRO manages the credit risk associated with available-for-sale financial assets by monitoring the
reputation, credit rating and reducing the aggregate risk of each party to the contract.
FR2: Financial Risk: Liquidity Risk
In managing liquidity ratios, ADRO monitors and maintains a level of cash and cash equivalents that are
estimated to be sufficient to finance operational activities and reduce the effects of fluctuations in cash flow.
ADRO management also regularly monitors cash flow forecasts and actual cash flows, including loan
maturity profiles. In addition, ADRO also arranged to have a standby loan facility that can be withdrawn in
accordance with the request to finance operational activities when needed.
FR3: Financial Risk: Capital Risk
ADRO in managing its capital always maintains business continuity and maximizes benefits for shareholders.
ADRO actively and routinely monitors and manages its capital to ensure optimal capital structure and returns
for shareholders by taking into account the efficient use of capital. ADRO also maintains a balance between
the loan rate and equity position to ensure optimal capital structure and returns.
RR1: Regulatory Risk: Regulatory Change Risk
Risk of regulatory change is related to changes to regulations that could threaten ADRO's ability to imple-
ment corporate strategy, execute important transactions, comply with contracts and other activities.
RP1: Project Risk: Failure to complete the project
ADRO has project risks related to failure to complete the project according to budgeted cost, schedule, time
and quality. To control project risk so that it is according to plan, completed on time and according to the
agreed budget and quality, ADRO selects a reputable contractor, forms a reliable project management team
and manages project risk.
RI1: Industrial Risk: Changes in Industry Opportunities
ADRO industry risk associated with the thermal coal business, which is the main source of income, has a
relatively high risk of price volatility. In order to control the risks of the thermal industry, ADRO has
established eight pillars of the non-coal business and will spur the non-thermal coal business as an effort to
diversify its business.
BR1: Operational & Business Risk: Health, safety and environmental
Risks K3LH risks arise from failure to provide a safe work environment for workers. In managing K3LH risk,
ADRO carries out several programs including:
1. Strengthening the Adaro Zero Accident Mindset (AZAM) program.
2. Comply with AMDAL, hazardous and toxic waste management, reclamation plans and mine closure plans.
3. Conduct annual K3LH performance evaluation.
4. Implement the K3LH management system throughout the ADRO group.
5. Hold quarterly meetings between ADRO directors and K3LH team.
6. Improve HSE competence through e-learning.
Apart from K3LH, ADRO also faces environmental risks and controls these risks by running an energy
management system based on ISO 50001 to increase energy efficiency.
BR1: Operational & Business Risk:Business Interuption Risk
ADRO has the risk of business disruption that can arise from major damage to main facilities and
infrastructure such as bridges, roads, transportation, coal terminals or obstruction of river flows. ADRO has
formed a Crisis Management Team (CMT) to control this risk and ADRO has insurance protection against
business interruption caused by damage to important facilities.
Appendix A: List Of Abbreviations
Abbreviation Full Term
ADRO PT Adaro Energy Tbk
PTBA PT Bukit Asam Tbk
ITMG PT Indo Tambangraya Megah Tbk
BYAN PT Bayan Resources Tbk
INDY PT Indika Energy Tbk
HRUM PT Harum Energy Tbk
ICE International Coal Exchange
PMI The Purchasing Manager’s Index
GDP Gross Domestic Product
ASP Average Selling Product
TP Target Price
DCF Discounted Cash Flow
CAGR Compounded Annual Growth Rate
EPS Earnings Per Share
P/E Price-to-Earnings Ratio
PWC Price Waterhouse Coopers
GPM Gross Profit Margin
NPM Net Profit Margin
WACC Weighted Average Cost of Capital
NI Net Income
EV Enterprise Value
EBITDA Earnings Before Interest Tax Depreciation and Accumulation
ROA Return on Assets
ROE Return on Equity
PLTU Pembangkit Listrik Tenaga Uap/Electric Steam Power Plant
AI Adaro Indonesia
BGC Balangan Coal
MIP Mustika Indah Permai
BEE Bukit Enim Energi
AMC Aadaro MetCoal
BEP Bhakti Energi Persada
KCR Kestrel Coal Resources
SIS Saptaindra Sejati
AEI Adaro Eksplorasi Indonesia
AMT Adaro Mining Technologies
MBP Maritim Barito Perkasa
SDM Sarana Daya Mandiri
IMPT Indonesia Multi Purpose Terminal
IBT Indonesia Bulk Terminal
MSW Makmur Sejahtera Wisesa
BPI Bhimasena Power
TPI Tanjung Power Inonesia
Appendix B: Financials
Appendix B-1: Balance Sheet
“US$ 000” 2016A 2017A 2018A 2019A 2020E 2021F 2022F 2023F 2024F
Current Assets
Cash and cash equivalents 1.076.948 1.206.848 927.896 1.576.191 972.152 810.621 1.118.075 1.057.667 1.146.947
Trade receivable 300.689 314.718 370.894 310.324 277.217 221.399 211.306 230.137 280.511
Inventories 73.417 85.466 112.005 121.030 89.052 103.578 113.488 120.987 134.244
Other current assets 141.661 372.130 189.499 102.179 111.039 131.668 136.450 119.470 186.560
Total current assets 1.592.715 1.979.162 1.600.294 2.109.924 1.449.460 1.267.266 1.579.316 1.528.261 1.748.261
Non-current assets
Fixed assets 1.544.187 1.506.553 1.609.701 1.722.413 1.205.324 1.462.728 1.680.574 1.611.387 1.870.400
Investments in joint ventures 46.675 45.810 576.888 685.226 435.376 575.105 519.009 627.593 521.237
Mining properties 2.436.565 2.355.258 2.296.723 1.534.233 1.101.899 1.783.121 1.741.516 1.579.534 1.540.989
Deferred tax assets 3.766 8.766 27.336 33.212 26.947 35.100 39.451 42.834 47.722
Goodwill 793.610 793.610 793.610 776.943 776.943 776.943 615.113 615.113 615.113
Other non-current assets 104.739 124.988 156.203 355.154 217.628 284.663 333.393 380.617 465.666
Total non-current assets 4.929.542 4.834.985 5.460.461 5.107.181 3.764.117 4.917.661 4.929.056 4.857.078 5.061.127
Total Assets 6.522.257 6.814.147 7.060.755 7.217.105 5.213.577 6.184.926 6.508.372 6.385.338 6.809.388
Liabilities and Equity
Current liabilities
Trade payable 207.794 279.163 341.766 335.521 305.703 258.735 330.109 298.115 309.038
Bank loans 122.850 201.160 182.671 506.606 352.477 366.634 125.806 354.557 382.430
Short term employee benefits 1.551 2.689 3.272 4.997 3.868 4.582 5.606 6.362 7.799
Other liabilities 312.360 290.290 288.734 386.023 279.800 276.024 311.046 285.510 260.419
Total current liabilities 644.555 773.302 816.443 1.232.601 941.849 905.975 772.567 944.544 959.686
Non-current liabilities
Provision for decommissioning, mine
92.966 115.724 125.100 147.709 108.323 144.529 150.476 164.691 186.362
rehabilitation, reclamation and closure
Post employment benefits liabilities 49.527 64.925 63.247 81.664 58.454 71.622 64.580 71.133 75.124
Bank loans 1.241.198 1.090.830 1.072.527 551.602 410.013 503.984 476.065 381596 354.269
Other non-current liabilities 708.129 677.739 680.746 1.220.134 883.096 1.076.034 1.136.937 937.331 1.080.631
Total non-current liabilities 2.091.820 1.949.218 1.941.620 2.001.109 1.459.886 1.796.169 1.828.059 1.544.751 1.696.365
Total liabilities 2.736.375 2.722.520 2.758.063 3.233.710 2.401.735 2.702.144 2.600.626 2.499.295 2.656.052
Equity
Share Capital 342.940 342.940 342.940 342.940 342.940 342.940 342.940 342.940 342.940
Additional paid in capital 1.154.494 1.154.494 1.154.494 1.154.494 1.154.494 1.154.494 1.154.494 1.154.494 1.154.494
Retained earnings 1.627.609 1.966.721 2.161.277 2.288.597 1.247.330 1.761.229 1.857.901 1.895.450 2.124.558
Non-controlling interest 639.424 623.357 652.293 253.323 97.127 240.545 527.659 517.922 540.262
Other Equity 21.415 4.115 (8.312) (55.959) (30.050) (16.426) 24.751 (24.762) (8.918)
Total Equity 3.785.882 4.091.627 4.302.692 3.983.395 2.811.842 3.482.782 3.907.746 3.886.044 4.513.336
Total liabilities and Equity 6.522.257 6.814.147 7.060.755 7.217.105 5.213.577 6.184.926 6.508.372 6.385.338 6.809.388
Source: Company Data & Analyst Estimate
Appendix B-2: Income Statement
“US$ 000” 2016A 2017A 2018A 2019A 2020E 2021F 2022F 2023F 2024F
Revenue 2.524.239 3.258.333 3.619.751 3.457.154 1.982.666 2.508.826 2.490.897 2.592.361 2.740.619
Cost Of Revenue (1.838.963) (2.116.831) (2.409.544) (2.492.563) (1.369.784) (1.583.934) (1.440.479) (1.713.927) (1.564.610)
Gross Profit 685.276 1.141.502 1.210.207 964.591 612.882 924.892 1.050.418 878.433 1.176.009
Operating Expenses (151.175) (183.651) (193.998) (232.585) (170.652) (190.355) (196.747) (192.222) (212.662)
Other Expenses 53.517 (6.026) (124.297) (114.464) (72.021) (93.583) (83.396) (81.347) (93.255)
Operating Income 587.618 951.825 891.912 617.542 370.209 640.954 770.275 604.864 870.092
Finance Costs (50.006) (52.994) (65.084) (66.336) (40.321) (51.431) (47.842) (42.758) (49.158)
Finance Income 9.092 18.733 23.606 28.256 19.078 24.898 24.232 30.402 26.735
Share in net profit/(loss) of
(184) 11.967 (29.436) 79.641 (12.395) 25.319 7.602 15.532 16.128
joint ventures
Profit Before Income Tax 546.520 929.531 820.998 659.103 336.570 639.739 754.266 608.040 863.797
Income Tax Expenses (205.834) (393.093) (343.457) (224.101) (131.083) (249.158) (293.762) (236.812) (336.421)
Profit For The Year 340.686 536.438 477.541 435.002 205.487 390.582 460.504 371.228 527.376
Earning Per Share 0,011 0,017 0,015 0,014 0,006 0,012 0,014 0,012 0,016
Source: Company Data & Analyst Estimate

Appendix B-3: Cash Flow Statement


“US$ 000” 2017A 2018A 2019A 2020E 2021F 2022F 2023F 2024F
Cash Flow From Operating Activities:
Net Income 536.438 477.541 435.002 205.487 390.582 460.504 371.228 527.376
Increase (Decrease) in:
Receivables (14.029) (56.176) 60.570 33.107 55.818 10.092 (18.831) (50.373)
Inventories 12.049 (26.539) (9.025) 31.978 (14.526) (9.909) (7.499) (13.257)
Trade Payable (Currrent Liabilities) 71.369 62.603 (6425) (29.818) (46.969) 71.374 (31.994) 10.923
Other Current Assets (230.469) 182.631 87.120 (8.660) (20.629) (4.782) 16.980 (67.090)
Other Current Liabilities 57.378 (19.462) 422.403 (260.935) 11.095 (204.782) 203.971 4.220
Cash Provided by (Used for) Operating Activities 408.638 620.598 989.825 (28.839) 375.371 322.497 533.854 411.799
Cash Flow From Investment Activities:
Increase (Decrease) in:
Fixed Assets 37.634 (103.148) (112.712) 517.089 (257.404) (217.846) 69.187 (259.014)
Other Non-Current Assets 56.923 (522.328) 465.992 825.975 (896.140) 206.451 2.791 54.964
Cash Provided by (Used for) Investment Activities 94.557 (625.476) 353.280 1.343.064 (1.153.544) (11.395) 71.978 (204.409)
Cash Flow From Financing Activities:
Increase (Decrease) in:
Non-Current Liabilities (142.602) (7.598) 59.489 (541.223) 336.283 31.890 (273.308) 141.615
Additional Paid in Capital - - - - - - - -
Others 19.437 (66.244) (604.285) (1.296.060) 438.187 164.358 (225.845) (44.341)
Dividend (250.130) (200.232) (150.014) (80.980) (157.829) (199.898) (167.085) (215.742)
Capital Share - - - - - - - -
Cash Provided by (Used for) Financing Activities (373.295) (274.074) (694.810) (1.918.263) 616.642 (3.650) (666.238) (118.469)
Net Cash Flow 129.900 (278.952) 648.295 (604.039) (161.531) 307.452 (60.406) 89.280
Cash Flow Beginning 1.076.948 1.206.848 927.896 1.576.191 972.152 810.621 1.118.072 1.057.667
Cash Flow Ending 1.206.848 927.896 1.576.191 972.152 810.621 1.118.072 1.057.667 1.146.947
Source: Company Data & Analyst Estimate

Appendix B-4: Financial Ratios


2016A 2017A 2018A 2019A 2020E 2021F 2022F 2023F 2024F
Profitability Ratio
Net Profit Margin (%) 13,50% 16,46% 13,19% 12,58% 10,36% 15,57% 18,49% 14,32% 19,24%
Gross Profit Margin (%) 27,15% 35,03% 33,43% 27,90% 30,91% 36,87% 42,17% 33,89% 42,91%
EBITDA Margin (%) 34,93% 38,82% 32,46% 30,31% 27,85% 35,43% 39,41% 33,84% 40,53%
Operating Margin (%) 23,28% 29,21% 24,64% 17,86% 18,67% 25,55% 30,92% 23,33% 31,75%
Return On Assets (%) 5,22% 7,87% 6,76% 6,03% 3,94% 6,32% 7,08% 5,81% 7,74%
Return On Equity (%) 9,00% 13,11% 11,10% 10,92% 7,31% 11,21% 11,78% 9,55% 12,70%
Source: Company Data & Analyst Estimate
2016A 2017A 2018A 2019A 2020E 2021F 2022F 2023F 2024F
Liquidity Ratio
Current Ratio (x) 2,47 2,56 1,96 1,71 1,54 1,40 2,04 1,62 1,82
Quick Ratio (x) 2,14 1,97 1,59 1,53 1,33 1,14 1,72 1,36 1,49
Cash Ratio (x) 0,07 0,09 0,10 0,11 0,11 0,12 0,12 0,15 0,15
Total Asset Tunover (x) 0,39 0,48 0,51 0,48 0,38 0,41 0,38 0,41 0,40
Financial Leverage
Debt to Asset Ratio (%) 46,07% 39,06% 44,81% 46,07% 43,69% 43,69% 39,96% 39,14% 39,01%
Debt to Equity Ratio (%) 85,41% 64,10% 81,18% 85,41% 77,59% 77,59% 66,55% 64,31% 63,95%
Debt/EBITDA (x) 4,35 2,35 3,09 4,35 3,04 3,04 2,65 2,85 2,39
Asset/Equity (x) 1,85 1,64 1,81 1,85 1,78 1,78 1,67 1,64 1,64
Activity Ratio
Inventory Turnover (x) - 33,00 31,07 32,91 20,59 23,12 21,25 20,31 40,38
Total Asset Turnover (x) 0,51 0,67 0,66 0,68 0,53 0,51 0,51 0,53 0,54
Fixed Asset Turnover (x) 0,39 0,48 0,51 0,48 0,38 0,41 0,38 0,41 0,40
Shareholders Ratio
Price Earning Ratio (x) 7,43 4,72 5,30 5,82 12,32 6,48 5,50 6,82 4,80
Price Book Value Ratio (x) 0,67 0,62 0,59 0,64 0,90 0,73 0,65 0,65 0,61
EV/EBITDA (x) 43,96 30,52 33,14 36,62 68,80 43,42 39,20 43,80 34,68
EV/Revenue (x) 15,36 11,85 10,76 11,10 19,16 15,38 15,45 14,82 14,05
Dividend Payout Ratio (%) 29,67% 46,63 41,93% 34,49% 39,41% 40,41% 43,41% 45,01% 40,91%
Dividend Yield (%) 3,99% 9,88 7,91% 5,92% 3,20% 6,23% 7,89% 6,60% 8,52%
Source: Company Data & Analyst Estimate

Appendix B-4: Growth Assumptions


2015 2016 2017 2018 2019 2020E 2021F 2022F 2023F 2024F
GDP Growth (Annual BPS, Forecast PWC) 4,88% 5,02% 5,07% 5,17% 5,02% -0,90% 5,60% 5,20% 5,20% 5,20%
Coal Production (Growt) - -1,09% 1,09% 18,92% 9,09% -14,06% 0,87% 2,36% 4,48% 2,69%
Coal production (Million Tons) 461 456 461 557 610 530 534,64 547,23 571,72 587,07
Sensitivity Coal Industry to GDP Growth - (0,22) 0,22 3,66 1,81 15,62 0,16 0,45 0,86 0,52
ADRO Growth - -6,15% 25,53% 10,52% -4,60% -42,65% 26,54% -0,71% 4,07% 5,72%
Sensitivity ADRO to Coal Industry - 5,64 23,41 0,56 (0,51) 3,03 30,34 (0,30) 0,91 2,13
Source: Company Data & Analyst Estimate

Appendix B-4: Valuation Assumptions


Year 2020E 2021F 2022F 2023F 2024F
EBIT 336.570 639.739 754.266 608.040 863.797
Tax (131.083) (249.158) (293.762) (236.812) (336.421)
Depreciation & Amortization 215.603 249.144 227.282 269.240 246.851
Change Working Capital (234.327) (15.211) (138.007) (162.626) (115.577)
Capital Expenditure (250.000) (418.793) (382.761) (349.451) (373.585)
Free Cash Flow (63.237) 205.722 167.018 453.643 285.064
Terminal Value 5.741.485
Total Free Cash Flow (63.237) 205.722 167.018 6.195.129 285.064
Present Value FCF (63.237) 185.862 136.328 4.568.610 189.928
Firms Value 5.017.491
Debt Value 1.807.662
Equity Value 3.209.829
Number of shares 31.985.962 Target Price
Equity Value per Share ($) 0,1004 Rp 1.445/Share
Price 6-Oct 2020 1.140
Upside 27%
Source: Company Data & Analyst Estimate
Appendix C: SWOT Analysis
Strength Weaknesses
ADRO has a lower polluting coal product, namely Envirocoal The risk of being exposed to changes in the value of the dollar currency
due to operating activities using the dollar currency
ADRO has thermal and metallurgical coal products ADRO do not have downstream products
Metallurgical coal is the main raw material for steel production
ADRO has a diversified non-coal business, thereby reducing the volatility
of coal business revenues
Strategic mining location, close to coal demand
Opportunities Threats
Power plants on several continents are developing Global disaster that causes the country's economic activities to stop
Demand for coal from China and India will continue to increase Government regulations and policies regarding mining permits
Gasification of coal to DME (Dimethyl Ether) Environmental campaign related to air pollution
Domestic market Obligation Still increasing for electricity Aktivitas penambangan tergantung pada cuaca
Global steel production and demand is expected to increase in the future
Source: Analyst Estimate

Appendix D: Z-Score Analysis


The Altman Z-Score Analysis indicates a company's financial health and, consequently, the probability of filing for bankruptcy. With the specified
formula, the indicator shows a score, in which below of 1.80 indicates a firm has a high probability of bankruptcy and a score of aproximately 3.00,
indicates a firm is far from a high bankruptcy probability. The formula is (1.2*X1) + (1.4*X2) + (3.3*X3) + (0.6*X4) + (1.0*X5).

Input Variables 2016 2017 2018 2019


Current assets 1.592.715 1.979.162 1.600.294 2.109.924
Current liabilities 644.555 773.302 816.443 1.232.601
Total liabilities 2.736.375 2.722.520 2.758.063 3.233.710
Total assets 6.522.257 6.814.147 7.060.755 7.217.105
Retained earnings 1.627.609 1.966.721 2.161.277 2.288.597
Revenues 2.524.239 3.258.333 3.619.751 3.457.154
Operating Income 587.618 951.825 891.912 617.542
Market capitalization 3.765.014 4.131.520 2.698.816 3.298.552
Working capital 128.788 988 144.045 698.868
Derived Variables
X1. Working capital/Total assets 0,02 0,00 0,02 0,10
X2. Retained earnings/Total assets 0,25 0,29 0,31 0,32
X3. EBIT/Total assets 0,09 0,14 0,13 0,09
X4. Market capitalization/Total liabilities 1,38 1,52 0,98 1,02
X5. Revenues/Total assets 0,39 0,48 0,51 0,48
Output
ALTMAN Z-SCORE 1,88 2,25 1,97 1,93
Source: Company Data & Analyst Estimate
Appendix E: M Score Analysis
The Beneish's M- score analysis, created in 1999 by Dr Messod Beneish, was used by our team to verify ADRO’s earnings quality in their financial
results, in regards of earnings manipulation detection. The method contemplates different variables which identify any earnings manipulation or finan-
cial distortions incurred by the firm. For interpretation needs, with an M-score lower than -2.22,the firm is not likely to be a manipulator of earnings.
However, an M-score greater than -2.22 indicates it is likely that the firm is.
The formula for the 8 variable model is: M Score = -4.84 + (0.92*DSRI) + (0.528*GMI) + (0.404*AQI) + (0.892*SGI) + (0.115*DEPI) -
(0.172*SGAI) - (0.327*LVGI) + (4.679*Accrual to TA)

Input Variables 2015 2016 2017 2018 2019


Net Sales 2.684.476 2.524.239 3.258.333 3.619.751 3.457.154
Cost of Goods Sold (2.141.176) (1.838.963) (2.116.831) (2.409.544) (2.492.563)
Net Receivables 195.694 300.689 314.718 370.894 310.324
Current Assets 1.092.519 1.592.715 1.979.162 1.600.294 2.109.924
Property Plant and Equipment 2.026.965 2.436.565 2.355.258 2.296.723 1.534.233
Depreciation 324.976 335.283 335.460 354.096 388.745
Total Assets 5.958.629 6.522.257 6.814.147 7.060.755 7.217.105
SGA Expenses 204.692 204.692 177.625 69.701 118.121
Net Income 151.003 340.686 536.438 477.541 435.002
Cash Flow From Operations 511.594 675.523 853.680 905.910 917.283
Current Liabilities 454.473 644.555 773.302 816.443 1.232.601
Long Term Debt 2.091.820 2.091.820 1.949.218 1.941.620 2.001.109
Working Capital - Cash - Depreciation (1.091.834) (1.541.019) (1.543.296) (1.426.037) (2.663.804)
Variables to Calculate M Score
DSRI = Day’s Sales Receivables Index 1,63 0,81 1,06 0,88
GMI = Gross Margin Index 1,34 1,29 0,95 0,83
AQI = Asset Quality Index 0,80 0,95 1,23 1,10
SGI = Sales Growth Index 0,94 1,29 1,11 0,96
DEPI = Depreciation Index 0,88 1,03 1,07 1,51
SGAI= SGA Expenses Index 1,06 0,67 0,35 1,77
LVGI= Leverage Index 0,98 0,95 0,98 1,15
Total Accruals/Total Assets -0,24 -0,23 -0,20 -0,37
M Score Variable Model -2,97 -3,24 -3,07 -4,53
Source: Analyst Estimate

Disclosures:
Ownership and material conflicts of interest
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias
the content or publication of this report.
Receipt of compensation
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or a director
The author(s), or a member of their household, does not serve as an officer, director, or advisory board member of the
subject company.
Market making
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer
The information set forth herein has been obtained or derived from sources generally available to the public and
believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express orimplied, as to its
accuracy or completeness. The information is not intended to be used as the basis of any investmentdecisions by any person or entity.
This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This
report is for limited publication and only for certain circles
Disclosures:
Ownership and material conflicts of interest
The author(s), or a member of their household, of this report does not hold a financial interest in the securities of
this company.
The author(s), or a member of their household, of this report does not know of the existence of any conflicts of
interest that might bias the content or publication of this report.
Receipt of compensation
Compensation of the author(s) of this report is not based on investment banking revenue.
Position as an officer or a director
The author(s), or a member of their household, does not serve as an officer, director, or advisory board member
of the
subject company.
Market making
The author(s) does not act as a market maker in the subject company’s securities.
Disclaimer
The information set forth herein has been obtained or derived from sources generally available to the public and
believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express
orimplied, as to its accuracy or completeness. The information is not intended to be used as the basis of any in-
vestmentdecisions by any person or entity. This information does not constitute investment advice, nor is it an
offer or a solicitation of an offer to buy or sell any security. This report is for limited publication and only for
certain circles

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