• Revenue exceeded our expectation by 10% due to higher average selling price (ASP), but net profit missed our expectation by 20% due to higher operating costs and income taxes.
• Coal price was buoyant in 3Q17 and hit YTD high in Oct-17. Production volume is on track for 14mn tonnes in FY17 (+47.4% YoY).
• Operating costs were higher than expected due to higher sales volume and marketing expenses.
• We lower FY17e EPS from 3.1 US cents to 2.8 US cents due to higher than expected operating costs. We maintain our FY18e EPS unchanged at 4.3 US cents. Based on unchanged average 12-month forward PER of 10x and the FX rate (USD/SGD) of 1.36x, we maintain a target price of S$0.59 for FY18 and reiterate our BUY recommendation.

Positives

+ Dual bonanzas propelled the performance: See the table below, top line’s growth was mainly contributed by coal mining which experienced a surge in both production volume and ASP. The sales target for FY17 remains at 14mn tonnes which we think GEAR will manage to achieve since it delivered 4.1mn tonnes in 3Q17 when the monsoon season extended to Jul-17. As of Oct-17, the coal price (ICI 4,200 GAR) arrived at YTD high of US$49.9/tonne with an increase for consecutive 4 months from the dip in Jun-17.

Negatives       

– The growth of overhead costs outpaced than expected: In 3Q17, the selling and distribution, and administrative expenses, major components of operating expenditures, grew by 76% YoY and 75.3% YoY respectively, due mainly to the rise of freight expenses resulting from 57.7% growth of sales volumes. During the period, GEAR actively expanded the coal sales beyond the domestic market, resulting in higher marketing costs. As a result, the YTD revenue contribution from Korea and China recorded growths of 5 ppt and 15 ppt.

Outlook

The coal price remains buoyant as of now. We think the price level of US$40/tonne (4,200 GAR) is favourable for GEAR given its relatively low cash costs. The forward-looking catalyst is still the ramp-up of production in FY18, which is expected to be more than 18mn tonnes (BIB mine + KIM mine) with the kick-starting of operations at the BSL mine. Furthermore, it has been actively seeking inorganic growth, which is not limited to coal business but would include precious metal businesses.

Investment action

We lower FY17e EPS from 3.1 US cents to 2.8 US cents due to expected higher operating costs while maintaining our FY18e EPS at 4.3 US cents. Based on unchanged average 12-month forward PER of 10x (the average of regional peers) and the FX rate (USD/SGD) of 1.36x, we maintain a target price of S$0.59 for FY18 and reiterate our BUY recommendation.