Geo Energy Resources Ltd: Gloomy 4Q but will be a bright FY18 March 19, 2018

PSR Recommendation: BUYStatus: MaintainedTarget Price: SGD0.47
  • FY17 revenue was in line with our expectations but net profit missed our expectations by 16.6% due to the accrual interest expenses of the Senior Notes.
  • FY17 production was in line with the adjusted target; average selling price (ASP) enjoyed a healthy YoY rise of 22%.
  • Not subject to the new domestic production and price regulation in Indonesia.
  • We maintain forecasted 10.8mn tonnes of sales volume and US$39/tonne of ASP in FY18. Meanwhile, we revise the cash cost upward to US$27.6/tonne (previous US$26/tonne). Accordingly, FY18e EPS are updated to 3.5 US cents (previous 4.4 US cents). Based on unchanged forward PER of 10.0x (the average of regional peers) and 1.36x of exchange rate (USD/SGD), we roll over the target price to FY18e earnings and maintain our BUY call with a higher price of S$0.47.

1

+ Positives

Align with the previous adjusted production target and enjoy a healthy price growth: The FY17 production volume was in line with the adjusted annual target guided in 3Q17. The increase in ASP offset the decrease in volume in 4Q17 which was due to the temporary limitation of holding capacity at the jetty. The coal price (ICI 4,200 GAR) remained strong in 4Q17, averaging at US$45.7/tonne (+6% QoQ).

2

– Negatives

Subject to higher cash costs and interest burden in 4Q17: The reported cash costs was US$30/tonne in 4Q17, the highest in the past two years. Apart from the variable portion of cash cost linked to movements in coal prices, the one-off additional mining royalties also resulted in the higher cash costs. Geo also accrued interest expenses from the US$300mn Senior Note, leading to US$6.7mn surge in finance costs. We expect cash cost to remain at the range of US$27-28/tonne while finance expense will be at least US$24mn in FY18.

Outlook

Geo has guided an annual production target of 11-12mn tonnes in FY18, of which 8mn tonnes will be from SDJ mine, and the rest will mainly come from TBR mine. TBR mine has commenced operations in 1Q18 and will enter into production phase in 2Q18. Our assumption of average coal price (4,200 GAR) is US$40/tonne in FY18. The concern on the potential impact of the amended Domestic Market Obligation (DMO) on coal sector is cleared since Geo’s mines are under IUP (previous mining business permit) rather than Coal Contract of Work (CCOW) (updated mining permit). Therefore, it is not subject to the new regulations. On the other hand, we expect Geo will conduct some M&As this year the  US$262mn cash on hand it has accumulated and sufferung from negative carry interest rates. At present, the market price of coal mines ranges from US$2.5-3/tonne in Indonesia.

Maintain BUY call with a higher target price of S$0.47

We maintain our forecasted 10.8mn tonnes of sales volume and US$39/tonne of ASP in FY18. Meanwhile, we revise the cash cost upward to US$27.6/tonne (previous US$26/tonne). Accordingly, FY18e EPS are updated to 3.5 US cents (previous 4.4 US cents). Based on unchanged forward PER of 10.0x (the average of regional peers) and the exchange rate (USD/SGD) of 1.36x, we roll over the target price to FY18e earnings and maintain our BUY call with a higher price of S$0.47.

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Chen Guangzhi
Investment Analyst
Phillip Securities Research Pte Ltd

Guangzhi graduated from Singapore Management University with a Master degree in Applied Finance and from South China University of Technology with a Bachelor degree in Electronic Commerce.

The current sector coverages include Energy, Utilities, and Mining sectors. He has 3 years experience in equity research in both Hong Kong and Singapore market. He is the mandarin spokesperson for Phillip Securities Research in relation to China-related projects and all mandarin seminars and client events.

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