ADRO - On cloud nine

 ADRO’s 1H22 net profit skyrocketed 614% YoY to USD1.21bn (+103.1% QoQ in 2Q22)

  We expect net profit of USD1.93bn and EBITDA margin of c. 50% in 2022 

 We reiterate our “BUY” call with 28% upside potential on a 12-month view on strong ASP 

Above expectation ADRO's net profit skyrocketed 613.5% YoY in 1H22 to USD1.21bn (103.1% QoQ in 2Q22), accounting for 62.7% of our FY forecast. This was supported by higher revenue of USD3.54bn in 1H22, growing 126.6% YoY (89.2% QoQ in 2Q22). GPM also expanded from 32.0% in 1H21 to 57.2% in 1H22, although cost of revenue surged 42.6% YoY as royalties quadrupled. Furthermore, operational expenses soared 65.8% YoY in 1H22 to USD143.1mn, largely from higher selling expenses due to commission. Nevertheless, EBITDA margin reached 61.0% in 1H22 (64.6% in 2Q22), compared to 41.5% in a year prior. Meanwhile, ADRO booked a share of profit in JV of USD177.25mn in 1H22 (USD107.7mn in 2Q22), compared to loss of USD16.5mn in 1H21 which was mostly derived from Kestrel. In addition, ADRO managed to maintain its net cash position in 1H22. Higher ASP, manageable cash cost ADRO's impressive performance in 1H22 was mainly supported by strong ASP +117.4% YoY (+61.7% QoQ in 2Q22) of USD125.9/MT (USD152.5/MT in 2Q22) in the midst of tight supply and rising geopolitical tension in Europe. Furthermore, sales volume also increased 6.6% YoY to 27.5mn MT (+18.4% QoQ in 2Q22 to 15mn MT), in line with higher production by 5.7% YoY to 28.01mn MT (+30.5% QoQ in 2Q22 to 15.9m n MT). For the cost front, ADRO's cash cost escalated 8.7% YoY to USD59.5/M (+20.1% QoQ in 2Q22 to USD64.4/MT). Meanwhile, strip ratio was up from 3.6x in 1H21 to 4.4x in 1H22 (4.6x in 2Q22). Coal price to remain high We expect ADRO's revenue and net profit of USD6,70bn in and USD1.93bn in 2022. We estimate the company's ASP of USD115/MT (+54.6% YoY), assuming that price increases in 2H22 is likely to decelerate, considering aggressive monetary tightening, slow economic recovery in China pertinent to the lockdown policies and cheaper Russian coal offered in the market. On top of that, we note that prolonged conflict in Ukraine, and higher demand during winter in 4Q22 coupled with heatwave in China will provide more upside risks to coal price. On the other hand, China has started to ramp up coal output/day by 18.7% YoY. We estimate sales volume to reach 56mn MT. In addition, we forecast EBITDA margin of 49-50% in 2022 despite higher royalties. ADRO strives to further diversify away from thermal coal by establishing green industrial park. Reiterate BUY on the back of high ASP amid strong demand and tight supply We maintain our BUY recommendation with a DCF-based price target of Rp4,750/share. The stock is currently traded at a 2022F PER of 5.1x and EV/EBITDA of 2.3x. We highlight several paramount catalysts namely 1) strong demands for coal; 2) the company's efforts to diversify its revenue to metallurgical coal, and renewable energy; 3) relatively efficient production thanks to integrated business; 4) strong USD and 5) robust balance sheet. Nevertheless, we note several downside risks to our recommendation, including 1) aggressive monetary tightening that may accelerate risk of recession; 2) lower-than-estimated output due to unsupportive weather; 3) global shifting to renewable and 4) change in government policies.