Results at a glance
Positives
+ Production plan is still on track: The slippage in sales of coal QoQ (2Q17:1.45 mn tonnes vs 1Q17:2.21 mn tonnes) was due to interruption of mining work, which stemmed from prolonged monsoon season as well public holidays. The duration of rainfall was reported at 321 hours (1Q17: 158 hours). The weather condition in 2Q17 was thought to be an anomaly. The group set the coal sales target of 10mn tonnes earlier on this year, out of which 7mn tonnes were secured. Management expects a higher volume of coal sales in 2H17 given better weather conditions.
Negatives
– Capital restructuring halted amid cash burning: In 1Q17, GEO proposed an early redemption of MTN with a par value of S$100mn (US$71mn) that is due in Jan-18, followed by a refinancing plan of issuance of a USD-denominated fixed rate senior note announced in Jun-17. However, the group decided not to proceed the new note offering in Jul-17. Hence, the early redemption is still pending. Apart from the capex of US$31.1mn upon the completion of the acquisition of TBR mine, other substantial cash outflows include deposits and prepayments of US$23.1mn for jetty expansion as well as dividend pay-out of US$8.7mn. As a result, cash in hand arrived at US$20mn as of Jun-17.
Outlook
Production target is on track with stable coal price in 2H17, and the free cash flows are expected to be US$15mn to US$20mn each quarter for 2H17. This appears to be insufficient to cover the full repayment of US$71mn MTN by Jan-18 without extra funding. Management reiterated that alternative sources of funding are available, including but not limited to bank loans, bonds, public/private placement, joint ventures, and new offtake agreements.
Investment Action
We maintain the unchanged forecast of coal sales volume of 8.5mn tonnes with ASP of US$37/tonne in FY17. We raise the forecast of PATMI to US$43mn (previous US$42mn) due to some costs adjustments. Based on a lower average forward 12-month PER of 10.0x (previous: 11.0x) and a high FX of 1.36 (previous 1.30), we derive our TP of S$0.44 for FY17 and maintain a BUY rating.
(This report is part of the Coal Sector report published on the same day.)
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.
