• Revenue beat our forecast by 23.5% due to higher than expected sales volume and average selling price (ASP). On the flip side, net profit missed by 6% due to higher cash cost and income tax expenses.
• 6mn tonnes of production volume in FY17 (+64.2% YoY). FY17 ASP grew a healthy 25.7% YoY.
• 4Q17 cash cost was higher than expected (+139.5% YoY).
• We lower FY18e to EPS 3.5 US cents (previous 4.3 US cents) due to the expectation of higher cash costs and interest burden. 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 lower our target price to S$0.48 for FY18 (previous S$0.59) and reiterate our BUY recommendation.

Positives

+ Exceeding the annual target amid buoyant coal prices: See the table below, the stunning performance in FY17 was mainly attributed to the ramp-up of production. Especially in 4Q17, the production peaked, substantially favouring the group to overshoot the full year production target of 14.4mn tonnes. Meanwhile, ASP recorded healthy YoY growth of 25.7% in FY17, driven by the persistent shortage of thermal coal supply in China. 

+ Securing total 15mn tonnes of order for FY18: At the beginning of FY18, GEAR signed 13 offtake agreements with clients including domestic power plants and trading houses. From this total, 9 contracts for export that locks 11.3mn tonnes of coal sales from the group and the remaining 4 domestic supply contracts will lock in another 3.8mn tonnes. To sum up, GEAR had secured 15.1mn tonnes of sales in FY18, which amounted to 75% of the annual target of 20mn tonnes.

Negatives             

– Cash cost was higher than expected in 4Q17: In 4Q17, the growth of cash cost outpaced that of production volume, owing to higher coal freight, mining overhead and royalty. Moving forward, it is expected that the cash cost will be maintained at US$23/tonne to US$24/tonne in this and next year.

Outlook

Recently, the Minister of Energy and Mineral Resources (MEMR) announced several adjustments pertaining to Domestic Market Obligation (DMO) for coal sector in Indonesia:

1. Coal miners are required to supply at least 25% of total production within 2018 to the domestic market.
2. Coal sale price for power sector for the public interest is fixed at US$70/tonne (on FOB Vessel basis) (6,322 GAR, total moisture 8%, total Sulphur 0.8%, and ash 15%) if the prevailing price is higher than US$70/tonne.  

We believe this amended regulations will have limited impact on GEAR since it has been supplying more than 25% of annual production domestically (FY16: 58%, FY17:30%). The fixed price will be mainly applied to the portion that is supplied to PLN (the Indonesian government-owned power corporation). We think the coal price outlook for GEAR remains stable with our assumption of US$43/tonne in FY18. The main performance driver will still be the growth of production (FY18e: +28% YoY). Moreover, the group had issued US$150mn of senior notes. After repaying US$50mn of facilities, GEAR has cash in hand amounted to c.US$290mn currently. We believe it will acquire more assets or investments to enhance the yield by leveraging the war chest in the near term.

Maintained BUY with a lower TP of S$0.48

We lower FY18e EPS 3.5 US cents (previous 4.3 US cents) due to the expectation of higher cash costs and interest burden. 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 lower our target price of S$0.48 for FY18 (previous S$0.59) and reiterate our BUY recommendation.