Excerpts from Phillip Securities Research report
Analysts: Chen Guangzhi and Jeremy Ng
 Geo Energy acquires coal mines and subcontracts the mining, overburden removal, and coal haulage services to PT Bukit Makmur Mandiri Utama (BUMA), the second largest mining services company in Indonesia. Photo: Company
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How Do We View Geo?
Catch the tailwind amid business expansion
After simplification of its coal mining business, Geo ramped up production capacity starting in FY16. At the same time, coal price has bottomed out since 2Q16 after 5 years of bearish trend. Both favourable conditions pulled up the financial performance of Geo.
Moving forward into FY17, Geo will encounter both relative certainty and uncertainty. Because of the updated offtake agreement, Geo has secured 7mn tonnes of coal sales, and we think it is capable to accomplish the order based on the approximated 6mn tonnes of sales in FY16. In terms of the estimated annual sales volume for FY17, it is reasonable to expect the Group to achieve sales of between 7mn tonnes and the targeted 10mn tonnes.
As for the uncertainties, it will be the coal price level, which heavily depends on how China regulates the coal market and the price level China aims to reach. When coal price was as high as it was in 4Q16, China’s coal-fuelled power plants suffered the high cost pressure; on the contrary, lower price will weaken coal miners’ profitability.
Therefore, we believe China’s central government will make efforts to balance the interest between both parties, and as a result, coal price is expected to stabilise. However, market is dynamic so price uncertainty remains.
Catalyst: more coal mine acquisitions and offtake agreements
As we mentioned above, the current 100mn tonnes of coal reserves are only enough for Geo to operate the business for 10 years on the assumption of 10mn tonnes per annum coal production.
To maintain the ongoing growth as well as to possibly tap into other energy sectors, Geo has to generate inorganic growth through M&A activities. In the foreseeable future, we can expect the Group to seek such opportunities. By end of 2016, Geo has received US$40mn in total from the offtake agreement. Since Geo has affirmed its expansion through duplicating the business model mentioned previously, we expect Geo to secure further offtake agreements in FY17 and FY18.
Valuation Methodology
Our primary valuation method is using the simple average of P/E ratio of comparable peers. Since Geo operates coal mining business in Indonesia, we use the average of P/E ratio of those companies that have similar operations there.
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Due to lack of reference data in forward P/E ratio for FY17, and being prudent, we use the average 3QFY16 annualised P/E ratio of BSSR, MBAP, TOBA, and KKGI (Bloomberg ticker), which is 11x, as the reference valuation P/E for FY17 forecast.
These 4 companies have market capitalization values that are close to Geo’s. If we use 11x P/E ratio together with 1.6 US cents of FY16e ESP, we can derive 17.6 US cents, which are equivalent to 25 SG cents (using spot USD/SGD 1.43), as FY16e target price. Therefore, we think the growth in FY16 has been factored in the current price level, and 11x P/E ratio is justified.
Full report here.
