MNCS COMPANY UPDATE MNC Sekuritas Research Division | November, 06 2018

Key Financial Highlight

Better 3Q18 Financial Result Driven by Good Weather ADRO posted revenue growth of 9.35% YoY and 18.77% QoQ to US$2.67 billion in 9M18 driven by a 8.35% YoY increase in blended ASP. The dry weather in August and September supported ADRO to increase coal production better than 2Q18. ADRO sales volume in 3Q18 rised 9.17% YoY and 20.20% QoQ to 15.47 Mt due to improving weather condition in 3Q18. We assess ADRO's revenue as still in line with our projection, reflecting 74.26% of MNCS estimate. We project ADRO revenue to grow 10.22% YoY/5.20% YoY to US$3.59 billion/US$3.78 billion in FY18E/FY19F . High Potential from Power Generation ADRO is currently running two power generation projects, namely, PT Tanjung Power Indonesia (TPI) and PT Bhimasena Power Indonesia (BPI). TPI has a capacity of 2x100 that is tergeted to start operating in 2019. BPI is a 2x1,000 MW coal-fired power plant with operasional target in 2020. At present TPI and BPI have signed a power purchase agreement with PLN for 25 years. We believe that this will certainly exert a positive impact on ADRO, since 100% of the coal needs of TPI and BPI (totaling 8 million tons) will be supplied by Adaro Mining, demonstrating the potential to pump ADRO coal sales. We project ADRO FY18E/FY19F sales volume to reach 52 Mt/55 Mt. High Demand from ASEAN Southeast Asia coal imports showed positive growth in 3Q18 where 90% came from Malaysia, the Philippines, Thailand and Vietnam. Most of the coal imports are supplied by Indonesia, which reflected in the growth of Indonesia's coal exports up to 8M18 rose 24.28% YoY. This certainly has a positive impact on ADRO, which is reflected in the portion of ADRO's coal exports to ASEAN, increasing to 38% in 9M18. BUY Recommendation for ADRO with TP: IDR2,300 We recommend BUY for ADRO with lower TP: IDR2,300, which implies PE/PBV of 10.82x/1.13x on FY18E and 9.60x/1.03x in FY19F. We believe that the acquisition of Kestrel and the power plant project will boost ADRO's performance in the future; against this, fluctuations in LIBOR interest rates and weather factors could act as principal impediments to ADRO's performance growth.

PT Adaro Energy Tbk (ADRO) Metal Mining Sector

Glowing with Electricity

Source: Bloomberg, MNCS as of Nov 05, 2018

IDR billion FY15 FY16 FY17 FY18E FY19F Revenue 2,684.48 2,524.24 3,258.33 3,591.34 3,778.22 EBITDA 638.72 934.22 1,276.84 1,402.48 1,521.95 Net Profit 152.44 334.62 483.30 470.06 512.35 ROA (%) 2.56 5.13 7.09 6.47 6.58 ROE (%) 4.55 8.84 11.81 10.48 10.73 PER (x) 22.07 10.06 6.96 7.16 6.57 PBV (x) 1.00 0.89 0.82 0.75 0.70

BUY

Stock Data

Major Shareholders

Curent Price :

52wk Range H-L :

Share Outstanding :

Free Float (%) :

Mkt Capitalization (IDR bn)

:

IDR1.575

IDR2,650-1,565

31,817 mn

43.66

51,817 bn

PT Adaro Strategic Investment

:

Garibaldi Thohir :

Edwin Soeryadjaya :

Theodore Permadi Rachmat

:

Public :

43.91%

6.18%

3.29%

2.54%

43.65%

Target Price : IDR2,300

Research Associate

Sukisnawati Puspitasari sukisnawati.sari@mncgroup.com (021) 2980 3111 ext. 52307

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9M18 Financial Performance : Revenue Increased 9.35% YoY & 18.77% YoY

PT Adaro Energy Tbk (ADRO) posted revenue growth of 9.35% YoY and 18.77% QoQ to US$2.67 billion in 9M18 (vs US$2.44 billion in 9M17) driven by a 8.35% YoY increase in blended ASP. ADRO sales volume in 3Q18 rised 9.17% YoY and 20.20% QoQ to 15.47 Mt due to improving weather condition in 3Q18. We assess ADRO's revenue as still in line with our projection, reflecting 74.26% of MNCS estimate. ADRO's cost of revenue rose by 13.22% YoY, mainly the victim of higher mining and fuel costs. On the bottom line, net profit attributable to owners of ADRO's parent entities decreased by -16.04% YoY to US$312.71 million in 9M18 (vs US$372.454 million in 9M17), following an increase in LIBOR which resulted in ADRO financial costs rising by 22.71% YoY. We project ADRO FY18E / FY19F revenue to grow 10.22% YoY/5.20% YoY to US$3.59 billion/US$3.78 billion.

MNCS Company Update | MNC Sekuritas Research Division

Exhibit 01. Financial Performance of ADRO FY15 - FY19F

Source: ADRO, MNCS

2,68 2,52 3,26 3,59 3,78

20,24%

27,15%

35,03% 34,42%34,94%

0%

5%

10%

15%

20%

25%

30%

35%

40%

-

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

FY15 FY16 FY17 FY18E FY19F

Revenue (LHS) GPM (RHS)Miliar USD

Rio Tinto Kestrel Acquisition Completed ...

In collaboration with EMR Capital Ltd (EMR), ADRO signed an agreement on March 27, 2018, aiming to acquire 80% ownership of Rio Tinto's Kestrel coal mine: this asset yielded 4.25 Mt of high-quality metallurgical coal in FY17, and possesses estimated salable reserves of 146 Mt and 241 Mt as a source of power. Following the August 2018 acquisition, ownership of Kestrel was split between Kestrel Coal Resources Pty Ltd (80%) and Mitsui Coal Australia (20%). Kestrel Coal Resources is a joint venture formed by ADRO (48%) and EMR (52%); thus, ADRO's overall ownership of Kestrel is 38.4%. Kestrel performance will be consolidated together with ‘other income’ in ADRO's forthcoming income statement.

Rio Tinto Australia's FY17 coal revenues grew by 7.40% YoY, up US $ 2.83 billion; net income also rose significantly, by 87.43% YoY to US $ 716 million. Rio Tinto is also considered a ‘dividend player’ whose FY17 dividend payout ratio (DPR) was reported at 58.07%. According to a Bloomberg consensus, the Rio Tinto DPR ratio for FY18E / FY19F is estimated at 57.49% / 62.66%. MNCS does not currently consolidate ADRO financial statements related to this acquisition; we do however consider ADRO's net profit as potentially strengthening, along with Kestrel's positive performance.

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MNCS Company Update | MNC Sekuritas Research Division

Exhibit 02. Kestrel Financial Performance vs DPR of Rio Tinto

Source: Bloomberg

2,662,83

0,38

0,720,89

1,22

1,81

1,04

66,24%

58,07%

52%

54%

56%

58%

60%

62%

64%

66%

68%

0,00

0,50

1,00

1,50

2,00

2,50

3,00

FY16 FY17

Pendapatan (LHS) Laba bersih (LHS) EBITDA (LHS) Total Aset (LHS) DPR (RHS)Miliar USD

… ADRO Focused on Coal Exports to ASEAN

Following the acquisition of Kestrel, ADRO coal sales display an opportunity to surge, with the addition of 100 million tons of export quota by the Indonesian government; the Ministry targets FY19F domestic coal production volume to increase 28.33% YoY to 530 million tons, definitely an opportunity for ADRO to increase its exports, which in 1H18 marked 78% of total sales. ADRO is focused on increasing coal exports to ASEAN nations, especially the Philippines and Vietnam, along with boosting the capacity of their power generation facilities. The Philippines Department of Energy (DOE) reported its installed capacity as having grown 6.1% YoY to 22,730 MW in FY17. In addition, there is a coal-fired power plant project with total installed capacity reaching 5,190 MW by FY20F. We therefore consider this project to be a handy opportunity for ADRO to expand its export network. ADRO is currently running two power generation projects, namely, PT Tanjung Power Indonesia (TPI) and PT Bhimasena Power Indonesia (BPI), with 65% and 34% ownership, respectively. TPI has a capacity of 2x100 MW and is located in Tabalong, South Kalimantan. As of 3Q18, TPI construction progress is reported at 96%, and the facility is targeted to start operating in 2019, while BPI progress is currently around 57%, with a 2020 operational target. BPI is a 2x1,000 MW coal-fired power plant located in Batang, Central Java. Once completed, this power plant will be one of the largest projects in Southeast Asia, as well as being the first power plant in Indonesia to exploit ‘ultra-supercritical’ (USC) technology, which promises higher thermal efficiency, while the USC boiler will minimize nitrous oxide (NOx) emissions. BPI will thus become the ‘cleanest’ power plant in Indonesia. At present TPI and BPI have signed a power purchase agreement with PLN for 25 years. We believe that this will certainly exert a positive impact on ADRO, since 100% of the coal needs of TPI and BPI (totaling 8 million tons) will be supplied by Adaro Mining, demonstrating the potential to pump ADRO coal sales. We project ADRO FY18E/FY19F sales volume to reach 52 Mt/55 Mt.

High Potential from Power Generation

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MNCS Company Update | MNC Sekuritas Research Division

Exhibit 03. Power Generation Projects in Philippines

Source: Philippines DOE, Google, MNCS

Pagbilao Coal-Fired Thermal Power PlantKapasitas : 420 MWTarget Operasi: Januari 2018

1Limay Power Plant Project Phase II

Kapasitas : 300 MWTarget Operasi

Unit 3 - Maret 2018Unit 4 - Des 2019

2

San Buenaventura Power Ltd (SBPL) ProjectKapasitas : 500 MWTarget Operasi: Desember 2018

3

Masinioc Expansion Project

Kapasitas : 300 MWTarget OperasiDesember 2019

4

RPEI Coal-Fired Power PlantKapasitas : 600 MW

Target Operasi: 2019

5

GNPower Dinginin 2x660 MW Supercritical Coal-Fired

Power PlantKapasitas : 1.200 MW

Target OperasiUnit 1 – Maret 2019

Unit II – Januari 2020

6

AOE Coal-Fired Power PlantKapasitas : 1.200 MWTarget Operasi: Unit I – Juni 2021

Unit II - TBD

7

Global Luzon Coal-Fired Power Plant

Kapasitas : 670 MWTarget Operasi: Januari 2022

8

BUY Recommendation for ADRO with TP: IDR2,300

We recommend BUY for ADRO with lower TP: IDR2,300, which implies PE/PBV of 10.82x/1.13x on FY18E and 9.60x/1.03x in FY19F. We believe that the acquisition of Kestrel and the power plant project will boost ADRO's performance in the future; against this, fluctuations in LIBOR interest rates and weather factors could act as principal impediments to ADRO's performance growth.

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Exhibit 05. Financial Projections

Source: Company, MNCS

Income Statement

IDR Billion FY15 FY16 FY17 FY18E FY19F IDR Billion FY15 FY16 FY17 FY18E FY19F

Revenue 2,684.48 2,524.24 3,258.33 3,591.34 3,778.22 Cash and cash equivalents 702.45 1,076.95 1,206.85 1,026.99 1,248.84

Cost Of Revenue 2,141.18 1,838.96 2,116.83 2,355.10 2,458.05 Trade Receivables 198.08 305.09 321.45 362.03 430.30

Gross Profit 543.30 685.28 1,141.50 1,236.24 1,320.17 Inventory 72.79 73.42 85.47 89.15 102.42

Other Current Assets 119.20 137.26 365.40 224.34 236.01

Operating Expenses 133.01 151.18 183.65 217.29 213.28 Total Current Assets 1,092.52 1,592.72 1,979.16 1,702.52 2,017.56

Other Operating Expenses 78.409 -53.517 6.026 6.026 6.026 Fixed Assets - net 3,494.08 3,980.75 3,861.81 4,222.25 4,401.17

Operating Profit 331.88 587.62 951.83 1,012.92 1,100.87 Other Non-Current Assets 1,372.03 948.79 973.17 1,341.53 1,370.04

Total Non-Current Assets 4,866.11 4,929.54 4,834.99 5,563.78 5,771.21

Finance Cost 60.76 50.01 52.99 32.36 50.72 TOTAL ASSETS 5,958.63 6,522.26 6,814.15 7,266.29 7,788.78

Finance Income 11.86 9.09 18.73 24.14 20.96 Trade Payables 196.42 207.79 279.16 327.10 289.66

Other Income (Expenses) (3.01) (0.18) 11.97 (118.43) (105.11) Short-term Debt 122.88 153.73 236.73 230.17 247.50

Profit Before Income Tax 279.97 546.52 929.53 886.26 966.00 Other current liabilities 1,831.81 1,730.30 1,433.32 1,506.93 1,769.34

Total Current Liabilities 2,151.11 2,091.82 1,949.22 2,064.19 2,306.50

Income Tax Expenses 128.97 205.83 393.09 407.68 444.36 Long-term Debt 1,444.47 1,295.96 1,156.32 1,190.25 1,387.08

Profit of the Year 151.00 340.69 536.44 478.58 521.64 Other Long-term liabilities 706.65 795.86 792.90 873.94 919.41

Total Long-term Liabilities 2,151.11 2,091.82 1,949.22 2,064.19 2,306.50

Minority Interest 1.44 (6.07) (53.14) (8.52) (9.29) Total Equity 3,353.04 3,785.88 4,091.63 4,484.38 4,776.32

Net Profit 152.44 334.62 483.30 470.06 512.35 TOTAL LIABILITY AND EQUITY 5,958.63 6,522.26 6,814.15 7,266.29 7,788.78

Balance Sheet

Cash Flow

IDR Billion FY15 FY16 FY17 FY18E FY19F Ratio FY15 FY16 FY17 FY18E FY19F

Net Income 152.44 334.62 483.30 470.06 512.35 Growth Year on Year Depreciation 306.84 346.60 325.01 389.56 421.08 Revenue Growth -19.27% -5.97% 29.08% 10.22% 5.20%

Change in Working Capital (41.69) (96.26) 42.96 3.66 (118.97) Gross Profit Growth -24.51% 26.13% 66.58% 8.30% 6.79%

Change in others (75.17) 131.37 (249.07) 47.74 (1.28) Operating Profit Growth -32.25% 77.06% 61.98% 6.42% 8.68%

CFO Total 511.59 675.52 853.68 911.03 813.18 Net Income Growth -14.31% 119.51% 44.43% -2.74% 9.00%

Short Term Investment (0.79) (1.13) (5.02) (0.83) (0.46) Long Term Investment 68.17 280.79 0.87 (354.68) (20.84) Profitability Capex (85.71) (833.28) (206.07) (750.00) (600.00) GPM 20.24% 27.15% 35.03% 34.42% 34.94%

Change in other (12.38) 143.59 (20.23) (12.84) (7.21) OPM 12.36% 23.28% 29.21% 28.20% 29.14%

CFI (118.45) (228.38) (433.38) (1,118.35) (628.51) EBITDAMargin 23.79% 37.01% 39.19% 39.05% 40.28%

Short Term Debt (66.95) 29.28 78.31 (10.20) 15.29 NPM 5.68% 13.26% 14.83% 13.09% 13.56%

Long Term Debt (214.42) (142.28) (150.02) 28.87 193.99 ROA 2.56% 5.13% 7.09% 6.47% 6.58%

Equity Financing - - - - - ROE 4.55% 8.84% 11.81% 10.48% 10.73%

Dividend (80.61) (101.08) (140.42) (141.02) (256.18) Other 3.18 275.23 (25.95) 149.82 84.07 DER (x) 0.44 0.36 0.32 0.29 0.32

CFF (422.81) (72.99) (288.66) 27.47 37.18 Net Cash Increase (29.67) 374.15 131.64 (179.86) 221.85 Current Ratio (x) 2.40 2.47 2.56 2.37 2.86

Closing Balance 702.45 1,076.95 1,206.85 1,026.99 1,248.84 Quick Ratio (x) 2.24 2.36 2.45 2.25 2.71

Ratios

MNCS Company Update | MNC Sekuritas Research Division

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Disclaimer This research report has been issued by PT MNC Sekuritas, It may not be reproduced or further distributed or published, in whole or in part, for any purpose. PT MNC Sekuritas has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; PT MNC Sekuritas makes no guarantee, representation or warranty and accepts no responsibility to liability as to its accuracy or completeness. Expression of opinion herein are those of the research department only and are subject to change without notice. This document is not and should not be construed as an offer or the solicitation of an offer to purchase or subscribe or sell any investment. PT MNC Sekuritas and its affiliates and/or their offices, director and employees may own or have positions in any investment mentioned herein or any investment related thereto and may from time to time add to or dispose of any such investment. PT MNC Sekuritas and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discusses herein (or investment related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies.

MNC SEKURITAS RESEARCH TEAM Edwin J. Sebayang Head of Retail Research, Technical, Auto, Mining edwin.sebayang@mncgroup.com (021) 2980 3111 ext. 52233

I Made Adi Saputra Head of Fixed Income Research imade.saputra@mncgroup.com (021) 2980 3111 ext. 52117

Victoria Venny Telco, Toll Road, Logistics, Consumer, Poultry victoria.nawang@mncgroup.com (021) 2980 3111 ext. 52236

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MNC Research Investment Ratings Guidance BUY : Share price may exceed 10% over the next 12 months

HOLD : Share price may fall within the range of +/- 10% of the next 12 months SELL : Share price may fall by more than 10% over the next 12 months

Not Rated : Stock is not within regular research coverage

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T. Heldy Arifien Head of Institution heldy.arifien@mncgroup.com (021) 2980 3111 ext. 52310

Okhy Ibrahim Senior Equity Institutional Sales okhy.ibrahim@mncgroup.com (021) 2980 3111 ext. 52180

Nesya Kharismawati Senior Equity Institutional Sales nesya.kharismawati@mncgroup.com (021) 2980 3111 ext. 52182

Harun Nurrosyid Senior Equity Institutional Sales harun.nurrosyid@mncgroup.com (021) 2980 3111 ext. 52187

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Sukisnawati Puspitasari Research Associate, Cement, Mining sukisnawati.sari@mncgroup.com (021) 2980 3111 ext. 52307

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MNCS Company Update | MNC Sekuritas Research Division

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