ADRO - Safer Bet on Coal

KBVS Update
Tuesday, 4 June 2024

ADRO- Safer Bet on Coal
(HOLD- TP: IDR3,200)

Booked solid profit generation in 1Q24. In 1Q24, ADRO booked solid net profit generation amid lower coal price of US$364 mn (-18.3% yoy, -11.4% qoq). The solid net profit generation stems from a combination of factors, including a 5% yoy growth in sales volume and a significant 29% reduction in indicative cash costs. This achievement is notable in the face of a challenging 24% yoy decline in ASP.

Upgrade our net profit forecast by 29% for 2024F. We upgraded our earnings estimate to US$1.14 bn for 2024F (-30.6% yoy), mostly driven by lower spread between Newcastle coal price to ADRO’s ASP and a slightly higher production level to 68 Mt in 2024 (previously 66 Mt). Despite higher average Newcastle price in 2Q24 (up to May’24) compared to 1Q24, lower ICI 3 average price (as of May’24) could lead to a decline in earnings on a qoq basis. Meanwhile, the ICI 4 average price has remained relatively stable in 2Q24 compared to 1Q24.

Geopolitical tension over shortages. Geopolitical tensions have disrupted the usual flow of coal around the world. While China's strong demand and lower production initially suggested a shortage, increased production from other countries and more hydropower in China have balanced things out. This new, post-disruption landscape creates challenges for future coal prices. Russia has announced the removal of export tariffs on thermal coal and anthracite from May 1 to August 31, aiming to bolster it’s coal industry.

We upgraded ADRO to HOLD with a target price of IDR3,200 (previously IDR 2,320), anticipating higher Newcastle coal prices assumption of USD115 for 2025 and USD110 for 2026 (previously USD100 and USD 90, respectively as well assigned lower spread between Newcastle and ADRO’s ASP. We still expect lower prices than in 2024 anticipating slower global economic growth due to the FED's prolonged higher interest rates.

Best Regards,