Excerpts from NRA Capital's report
Analyst: Liu Jinshu
4Q16 PATMI to jump by 72% from 3Q16 on higher coal price. Geo Energy’s 3Q16 results were better than expected with PATMI of US$7.4m against our forecast of US$5.4m. In this update, we revised our forecasts to better match our 4Q16 average selling price (ASP) assumptions with prevailing coal prices. Based on an ASP of US$40/tonne of coal and 15% higher cash cost per tonne from 3Q16, we now expect Geo Energy’s PATMI to jump by 72% in 4Q16 to US$12.8m! This is in spite of us assuming US$2.1m of one-off expense due to additional tax assessment by the Indonesian Tax Office.
Volume growth in FY17 to offset coal price risk. Based on Geo Energy’s results announcement, 4Q16 volume is likely to be about 2.25m tonnes, cumulating in about 5.4m tonnes in FY16. For FY17, Geo Energy has a target of 10m tonnes, almost doubling output. There is some concern that the recent increase in coal price have been partly due to short term factors such as weather and that coal price may soften in 2Q17.
The breakeven ASP based on our updated FY17 volume and cost assumptions is about US$30.25/tonne. If ASP remains unchanged from FY16 at US$33.4/tonne, Geo Energy’s PATMI in FY17 should still grow by about 3% to 5% given higher costs. Therefore, Geo Energy’s target production in FY17 comes in timely to mitigate against lower coal price.
FY17 PATMI expected to grow 68%. As a base case, we assume ASP of US$35.3/tonne in FY17 (unchanged from our last update), down from US$40/tonne in 4Q16. However, we also revise forecast production in FY17 from 6m tonnes to 9m tonnes. The anticipated volume growth is justified by Geo Energy’s acquisition of the TBR mine right next to its SDJ mine.
Based on the higher volume and higher cash cost of US$26.0/tonne (versus the FY16 average of US$23.9/tonne and our previous FY17 estimate of US$25/tonne), FY17 PATMI is projected to be US$34.0m or 68% higher than our estimate of US$20.3m for FY16.
|Valuation revised to S$0.345. As a result of the higher production forecasts for FY17 and FY18, our free cash flow valuation of Geo Energy has been revised upwards to S$0.345, translating to upside of 34.7% from the current share price of S$0.255. On balance, we maintain our Overweight rating, but reposition Geo Energy from high return / high-average risk to high-average return / average risk.
-- Liu Jinshu,
NRA Capital analyst
Pending completion of acquisition of TBR mine.We expect Geo Energy to complete the acquisition of the TBR mine within this year. With the management services agreement with the AJE mine, Geo Energy will be managing both mines to the left and right of its SDJ mine, thus facilitating higher economies of scale, e.g. larger mine pit.
Consequently, we expect 4Q FY16 PATMI to be about US$10.5m, bringing estimated 2H FY16 PATMI to US$15.9m, up by more than 100% from our previous estimate of US$7.86m. For FY17, ASP of about US$35.3/tonne, cumulating in PATMI of US$29.55m!
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