Adaro Energy's US$217m beats analysts' forecast by 15%

Driven by strong cost discipline.

Adaro Energy’s headline EPS of US¢12 for 2Q was below the estimate of Barclays, while underlying EBITDA was 15% ahead.

According to a research note from Barclays, strong cost discipline in the quarter was the key driver for the underlying beat, while one-off losses resulted in a miss at the headline net income level.

Despite cost discipline in 2Q, the company has maintained its full-year cash cost guidance at US$35-38/t.

This in the context of 1H14 cash cost of US$31.7/t, which suggests that even the bottom end of the cost guidance implies an 18-20% h/h increase in cash costs.

Here’s more from Barclays:

Coal prices are likely to remain range-bound as high system inventories and more seaborne coal availability during the dry season in Indonesia are likely to dampen the effects of a seasonal pick-up in demand.

We think the 35% rally in the share price since April has priced in most of the positives of strong cash flows, while the current valuation does not leave material upside vs the sector average. We maintain our Equal Weight rating.

Strong underlying, headline miss on one-offs: Underlying EBITDA of US$217 million was 15% ahead of our estimate, but fell 24% q/q on lower ASPs. However, the headline EPS of US¢12 was lower than our estimate of US¢15.

Barring seasonality, cost/t most likely has bottomed: Adaro has worked to cut COGS (ex-SG&A) from US$50/t in 2012 to below US$40/t in 2014, thus cushioning the impact of lower coal prices. Strip ratio cut has been one of the major drivers for cost reduction, which is now slated to increase y/y in 2014.

We believe that the company has limited opportunities left for further cost reduction and that meaningful upside to earnings will have to come from coal prices, where overcapacity and high inventories in China will take another two to three years to work through the system, in our view.

Adaro continues to be #2 pick after PTBA (Overweight) in ASEAN coal coverage: Adaro has weathered the decline in coal prices over last two years with greater operational discipline and improving product mix.

This was reflected in highest ever FCF of US$585 million in 2013, which was highest ever in the last five years, when coal prices declined by US$10/t.

This has been reflected in 35% share price rally since April 2014, thus limiting further upside in our view, while valuations at 12.6x 2014E are at the top end of our sector average valuation range.