The coal price is expected to remain under pressure in the remainder of 2016. Indonesia's benchmark thermal coal price (in Indonesian: harga batubara acuan, abbreviated HBA), determined each month by Indonesia's Energy and Mineral Resources Ministry, was set at USD $51.20 per ton for May 2016, down 4.3 percent from the HBA at the end of 2015. Recently, the Indonesian Coal Mining Association (APBI) said it expects this coal price to remain stable around USD $50 per ton this year, implying that the HBA price will record a fifth straight year of decline (in 2015 the HBA coal price averaged USD $60.1 per ton in full-year 2015).

Due to the low coal price, Adaro Energy is not eager to raise its production volume. Last year, the miner produced 51.5 million tons of coal. This year, production is estimated to rise slightly to the range of 52-54 million tons.

However, despite the lower coal price and limited rise in production, Danareksa Sekuritas expects Adaro Energy to post rising net profit supported by the company's lower net gearing ratio. This ratio fell from 35 percent in Q1-2015 to 24 percent in Q1-2016. The ratio is estimated to fall to 16 percent in the remainder of the year, and to 7 percent by 2017. This will also make it easier for Adaro Energy to obtain loans (with lower lending rates) for business expansion in the future.

Indonesian Government's Benchmark Thermal Coal Price (HBA):

Month    2012    2013    2014    2015
January   109.29    87.55    81.90    63.84    53.20
February   111.58    88.35    80.44    62.92    50.92
March   112.87    90.09    77.01    67.76    51.62
April   105.61    88.56    74.81    64.48    52.32
May   102.12    85.33    73.60    61.08    51.20
June    96.65    84.87    73.64    59.59
July    87.56    81.69    72.45    59.16
August    84.65    76.70    70.29    59.14
September    86.21    76.89    69.69    58.21
October    86.04    76.61    67.26    57.39
November    81.44    78.13    65.70    54.43
December    81.75    80.31    69.23    53.51

in USD/ton
Source: Ministry of Energy and Mineral Resources

On the one hand, low crude oil prices put downward pressure on coal prices. On the other hand, low crude oil prices curtail Adaro Energy's production costs. In the first quarter of 2016 Adaro Energy's financial results exceeded analysts' estimates, by far, supported by lower production costs. Net profit in Q1-2016 rose 3 percent (y/y) to USD $61 million (despite the lower coal price), while revenue plunged 18 percent (y/y) to USD $586 million.

Read more: Overview and Analysis of Indonesia's Coal Industry

For the moment, Danareksa Sekuritas advises investors to hold on to shares of Adaro Energy. On Tuesday (17/05) Adaro Energy's shares rose 1.46 percent to IDR 695 a piece. So far this year its shares have surged 34.95 percent. Danareksa Sekuritas set its target price for Adaro Energy at 800 per share.

Stock Quote Adaro Energy - ADRO:

Meanwhile, like other mining companies, Adaro Energy has been expanding into the downstream power generation industry. Not coal, but power generation could be the center of a new super-cycle in Indonesia as the government pushes for the construction of 35,000 megawatts (MW) of additional power plants in the next five years. Adaro Energy is involved in the construction of two 100 MW power plants in South Kalimantan (worth USD $4.5 billion in total), while - through the creation of a joint venture with Japan's Itochu Corporation and Electric Power Development Co Ltd (J-Power) - it is building the 2 GW coal-fired Batang plant in Central Java. Adaro Energy also made a strategic alliance agreement with state-owned energy company Pertamina in late-2015. Through this agreement Pertamina will supply Adaro Energy's fuel needs (between 400,000 kiloliters and 550,000 kiloliters per year) for the next seven years, while Pertamina can rent and utilize a fuel terminal owned by a subsidiary of Adaro energy.

Future Projection Adaro Energy's Financial Highlights:

    2014   2015  2016F  2017F  2018F
Net Revenue  3,325  2,684  2,373  2,530  2,765
Net Profit   206   195   133   152   181
EBITDA   873   735   610   641   692
P/E Ratio (x)   11.3   11.3   13.1   11.8   10.3
P/BV (x)    0.7    0.6    0.6    0.6    0.6

in million USD, unless otherwise stated
Source: Danareksa Sekuritas (17/05/2016)