Southeast Asia’s Best Stock Seen Extending Rally on Cost Cut

  • Adaro Energy’s rally is 3 times bigger than runner-up AirAsia
  • Cost cuts led to the largest 3Q Ebitda margin versus peers

PT Adaro Energy, Southeast Asia’s best-performing stock this year, is expected by analysts to extend gains in 2017 as it benefits from rising coal prices and cost-cutting initiatives.

The coal miner’s measures to reduce expenses resulted in an earnings before interest, taxes, depreciation and amortization margin of 36.2 percent in the third quarter, the largest among Indonesia’s five biggest listed coal miners, and the highest quarterly reading in three years, according to data compiled by Bloomberg. Adaro’s shares more than tripled in 2016, also buoyed by rebounding commodity prices, and analysts see the stock advancing another 8.1 percent in the next 12 months to the highest since May 2012.

Adaro is “the most cost efficient coal producer and the second cheapest in terms of enterprise value over Ebitda,” said James Wahyudi, an analyst at PT Sinarmas Sekuritas in Jakarta. “We estimated its revenue to increase by 47 percent in 2017 and net profit to rise by 27 percent.”

The country’s second largest coal miner by output is expected to report a 32 percent increase in net income next year as its revenues climb a projected 15 percent, according to estimates from analysts surveyed by Bloomberg. Adaro has been a “consistent long-term player” as it decreased its cash costs by 36 percent in five years, said Sandro Sirait, an analyst at Trimegah Securities in Jakarta.

Adaro has managed to lower its stripping ratio, the volume of soil waste to be handled to extract a ton of coal, without affecting its reserves due to the size of its pit, Sirait said. To further reduce its costs, Adaro also contracted its own unit to do more of the mining work rather than outsourcing the job, he said.

Share Boost

Adaro shares surged 228 percent this year, almost three times as much as the equities of AirAsia Bhd., which had the second largest rally on the MSCI South East Asia Index. Erindra Krisnawan, a Jakarta-based analyst at CIMB Securities whose recommendation on the stock produced the best return among analysts surveyed by Bloomberg, predicts the stock price could rise to 1,950 rupiah from 1,690 rupiah on Friday.

Rising commodity prices and expectations for higher demand has boosted the Jakarta Stock Exchange Mining Index 70 percent this year, making it the best performer among nine industry groups in the benchmark measure. Some investors are also betting that U.S. President-elect Donald Trump’s plans to boost infrastructure spending will result in even more demand for commodities and energy.

Rally Overdone

Adaro shares traded unchanged at 1,690 rupiah at 10:15 a.m. local time in Jakarta after gaining as much as 0.9 percent earlier. Despite this year’s rally, Adaro trades at 11.4 times of its 12-month projected earnings, near its three-year average of 11.1 times. However, Indra Mawira, a fund manager at Panin Asset Management in Jakarta, said he sees more downside risk for coal stocks.

“The rally in coal stocks might be overdone as the recent uptrend in coal prices was driven by the intervention of the Chinese government instead of fundamentals,” Mawira said. “I don’t think it can be sustained. We see the new equilibrium for coal price of around $60-70 per ton.” The coal price at Australia’s port of Newcastle climbed 2.5 percent on Dec. 28 to $91.75 per ton, according to data compiled by Bloomberg, taking its year-to-date advance to 102 percent.

Adaro Energy’s spokeswoman Febrianti Nadira said in an e-mail that the company will provide guidance for 2017 in early February and will continue to look at efficiency improvements. “We are optimistic with the prospect from Indonesia and other Southeast Asian countries as these countries will continue to depend on coal to fuel their surging energy needs to achieve stronger economic growth.” Nadira wrote.

Adaro’s largest shareholder, PT Adaro Strategic Investments with a 43.9 percent stake, could not be reached for comment.

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