The onset of the Russia-Ukraine war in February 2022 caused a dramatic surge in global energy prices, including coal and natural gas. This was largely due to disruptions in supply chains, particularly as Europe, heavily reliant on Russian natural gas, scrambled to secure alternative energy sources. Sanctions on Russian energy exports and reduced pipeline flows further exacerbated the crisis, driving up demand for liquefied natural gas (LNG) and coal.
As natural gas prices soared, many countries, especially in Europe, turned to coal as a substitute for power generation. This shift caused coal prices to spike, reaching unprecedented levels. For instance, European coal prices hit record highs of over USD 400 per metric ton in 2022, nearly double their pre-war levels.
This trend underscored a temporary revival of coal use in regions like Europe, where energy diversification efforts also included reopening dormant coal plants. Meanwhile, countries like India and China, major coal consumers, saw steady coal demand due to their reliance on it for electricity and industrial production.
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In our view, energy sector can once again steal the spotlight of Indonesia's stock market. We believe the heightened tensions between the United States and China is likely to devaluate CNY, and when CNY is devaluated, as seen in 2018, it could weaken the IDR and increase demand for USD-earning companies. Heightened geopolitical tensions in the Middle East and Eastern Europe are also expected to drive energy prices higher, benefiting Indonesia’s energy producers. Additionally, Indonesia’s plans to introduce incentives aimed at achieving energy independence are anticipated to generate significant momentum for the sector, particularly in the context of limited attractive investment opportunities in other industries.
ADRO is one of the largest players in the renewable energy sector. We anticipate that once ADRO secures the export license for the 0.4 GW solar panel project in Batam, its valuation will rise significantly. This is further supported by the expected progress on the 1.3 GW hydropower plant construction in North Sumatra.
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The recent decline in ADRO's share price has significantly reduced its valuation, making it increasingly attractive to investors. Currently, the stock is trading at 0.62x PBV ratio, much lower compared to its historical averages and industry peers. Although we believe the rebound on ADRO's share price may not be v-shaped, but we believe it's worth waiting when we consider both its business future as well as its current valuation.
ADRO's Solar Power Gross Margin and Financial Forecast
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The company is well-positioned to become one of Indonesia's leading renewable energy providers, with a total renewable energy capacity of 1.7 GW currently under development, comprising 1.3 GW from hydropower and 0.4 GW from solar power. The hydropower plant, in which the company holds a 50% stake, is expected to generate a strong average ROE of 31%. Additionally, the solar power plant is projected to export electricity to Singapore at an estimated rate of USD 0.25 per kWh.
Our valuation analysis estimates the net present value (NPV) of these renewable projects at USD4.2 billion, implying an attractive EV/EBITDA multiple of 3.7x and an IRR of 15%. These renewable energy investments are anticipated to provide a significant 56% upside to the company's valuation, highlighting their strategic importance and financial potential. Therefore we reiterate our BUY rating with a TP of IDR 4,500.
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