+ Production volume on-track for FY19 target. In 1Q19, the quarterly production volume arrived at a historical high of 7.1mn tonnes, which accounts for 28.4% of FY19 target of 25mn tonnes. The steady growth was owing to the ramp-up of output in BIB mine whose FY19 mining plan is 22mn tonnes.
+ Moderate drop in cash cost. In 1Q19, cash cost decreased by 8.9% YoY and 21.8% QoQ to US$23.3/tonne due mainly to the fall of ASP (part of the fuel cost is proportionate to ASP) and the change of terms in coal hauling services (from hourly basis to distance basis). The guidance for full-year cash cost remains at US$25/tonne to US$26/tonne.
– Sink in ASP. During 1Q19, ICI 4 averaged at US$38.6/tonne (down 16.2% YoY but up 27.8% QoQ). Accordingly, the ASP plunged by 26.8% YoY and 13.3% QoQ to US$34.7/tonne.
The tailwinds for GEAR are the expected 10.6% YoY growth of production and 8.8% YoY drop in cash cost. But the price headwind is the primary concern. China is still firm on the coal import restriction. We hold the FY19e ASP at US$40/tonne (4,200 GAR) given the recent recovery of ICI 4 price. Accordingly, we expect the profitability will be better off for the rest quarters. Therefore, we believe the overall FY19e performance is comparable to FY18. On the other hand, the two investments* over the past two years (10% stake of Westgold at A$1.885 and 25% stake of Stanmore coal at 25.5% at A$0.95) will help the balance sheet.
Downgrade to ACCUMULATE with a lower TP of S$0.24 (previously S$0.30)
We lower FY19e EPS to 1.8 US cents (previously 2.2 US cents) due to higher overhead costs resulting from higher sales volumes. Based on the unchanged peer average forward PER of 10x and the FX rate (USD/SGD) of 1.36x, we downgrade our recommendation to ACCUMULATE with a lower target price of S$0.24 for FY19.