Excerpts from RHB report
We fine-tune our assumptions on coal prices and increase GEAR’s FY18F-FY19F earnings by 8.3% and 3.5%, respectively.
Maintain BUY with a revised TP of SGD0.68 (from SGD0.71. 42% upside), which implies our FY18F P/E of 13.1x. A key main catalyst is a sizable increase in earnings ahead due to the substantial increase in coal production. |
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Coal being transferred to barges by conveyor belts at Bunati Port belonging to GEAR. NextInsight file photo.
Raising our coal price assumptions.
Coal prices have rallied to above USD100/tonne. We think they should soften by April, as China’s winter season is likely to end at end-March, and the La Nina is expected to end in April. However, we do not expect coal prices to soften significantly as we anticipate Newcastle coal price to soften to not lower than USD85/tonne (Newcastle 6,000kcal/kg).
Positive factors supporting high coal prices include:
i. Another cut in China’s coal production capacity of c.360m tonnes in 2018;
ii. Healthy China coal consumption as its Purchasing Managers' Index (PMI) stays in an expansion mode with 147GW of new coal-fired power plants under construction;
iii. Indonesia’s declining coal supply for export markets.
We upgrade our coal price assumptions to USD90/tonne, USD85/tonne and USD78/tonne for FY18-20 respectively.
Ramping up its coal production to 18m tonnes in FY18F (vs 14m tonnes in FY17).
Golden Energy and Resources (GEAR) has proved its ability to ramp up its coal production to 9.5m tonnes in 2016 from 4.4m tonnes. It is on track to deliver its FY17 coal production target of 14m tonnes.
| • Golden Energy & Resources -- One of the largest thermal coal reserve owners in Indonesia. • Sizable increase in coal production. The company plans to boost its Borneo Indobara’s (BIB) coal production to 13m tonnes in 2018 , 22m tonnes in 2020 and 40m tonnes from 2024 onwards. |
To ensure the ramp up in coal production, GEAR has appointed two coal industry veterans, ie Mr Bonifasius and Mr R Utoro as the president director and director respectively of its 66.9% subsidiary, Golden Energy Mines (GEMS) effective 1 Jan 2017. Mr Utoro was formerly Kaltim Prima Coal’s (KPC) chief operating officer and instrumental in increasing that company’s coal production to >60m tonnes pa (mtpa) from 2 mtpa.
We believe GEAR would be able to deliver its FY18 coal production target of 18m tonnes as it has renewed its contract with mining contractor Saptaindra Sejati (SIS), a subsidiary of Adaro Energy, for a period up to Dec 2020.
| Maintain BUY. We fine-tune our assumptions on coal prices and increase FY18F-FY19F earnings by 8.3% and 3.5%, respectively. We reiterate our BUY call with a revised TP of SGD0.68, which implies a 13.1x FY18F P/E. A key main catalyst is a sizable increase in earnings ahead due to the substantial increase in coal production. Key risks to our call include execution risks in ramping up coal production, weaker-than-expected coal demand, weaker-than-expected coal prices and regulatory risks. |
Full report here.
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