GEO ENERGY: Outperform, target is 42 cents, says KGI

Geo Energy (GERL SP): Joining the 12.12 sale

• BUY Entry – 0.33 Target – 0.42 Stop Loss – 0.30
  
  

• Geo Energy
  Share price:  34 c	Target:  42 c

  Geo Energy is one of Indonesia’s leading coal producers. The company has four mining concessions located in South and East Kalimantan. Geo Energy’s two key mines have a total estimated coal reserve of 77 million tonnes, based on a Joint Reserves Committee (JORC) Compliant report as at 31 August 2021, based on the latest IQPR published on 3 December 2021. 
  
  
• 12.12 sale. Geo Energy bought back shares for the first time ever. The company acquired 2.3mn shares at a price of between S$0.315 and S$0.320 on 15 Dec 2021.
  
  This comes on the heels of the most recent valuation announcement that the combined value for its two mines, SDJ and TBR, are estimated to be at US$726mn as at 31 August 2021.
  
  That works out to roughly US$0.51 per share or around S$0.67 per share vs its current share price of S$0.335.
  
  
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  China still needs lots of coal. China, the world’s biggest coal miner and consumer, produced 371mn tonnes of coal in November, the highest on record. This is according to the National Bureau of Statistics, which published the data on Wednesday.
  
  The record output likely caused traders to cover their short positions on HK-listed coal miners such as Yankuang Energy Group (1171 HK, previously known as Yanzhou Coal Mining), which gained 24% yesterday. Essentially, what this shows is that demand for the dirty fuel remains strong despite all the talk about ESG and going green. 
  
  
• Cash generating machine. We estimate Geo Energy will generate at least US$247mn (S$333mn) of free cash flows in 2021 and 2022, making up 70% of its current market cap of S$475mn.
  
  Our estimates are based on US$58/US$50 coal prices and 10.5mn/11.0mn tonnes of coal production in 2021 and 2022, respectively. Our assumptions are conservative given that current ICI4 future prices are trading at around US$63/tonne (after peaking at US$155 in mid-Sep 2021). 
  
  

  We currently have an Outperform and DCF-backed TP of S$0.42 on Geo Energy. Our fair value is based on DFC with a conservative set of assumptions: 1) 13.5% discount rate, 2) six-year mine life up to 2026, and 3) no terminal value. The strong cash flows over the next two years will provide the group options to diversify via acquisitions. The group currently trades at 3x 2021F P/E and 4x FY2022F P/E.