Adaro produced 38.5 mn tons of thermal coal in 2008, the second largest after
Bumi Resources’
production of 52.8 mn tons. As Bumi only controls 65%-70% of its coal-mining
subsidiaries KPC
and Arutmin combined production, Adaro is in fact the biggest coal producer in
Indonesia, in our
view.
Adaro’s current stripping ratio is at very of only 4x making the company as
one of the lowest-cost
producers in Indonesia.
We use a discounted cash flow (DCF) method to derive our target price for
Adaro of Rp1950,
providing 28% upside potential. We have assumed a WACC of 13.2%, a beta of
1.1x, risk premium
rate of 5.5% and after tax cost of debt of 6%. We assigned terminal growth of
5% for SIS and 0%
for coal mining operations .