Geo Energy Resources Ltd - Phillip Securities 2017-05-25: Temporary Headwinds Are Limited

GEO ENERGY RESOURCES LIMITED RE4.SI

Geo Energy Resources Ltd - Temporary Headwinds Are Limited

Revenue and net profit exceeded our expectation mainly due to higher average selling price (ASP). Our forecasted ASP is US$37/tonne in FY17, and average ICI 4,200 price was US$43/tonne.
We maintain the unchanged forecast of 8.5mn tonnes of coal sales volume with US$37/tonne average selling price (ASP) in FY17.
Due to the probably early redemption of MTN, the mild drop in finance costs will improve the net profit slightly from previous forecasted US$41mn to updated US$42mn.

Geo proposed a consent solicitation exercise for an early redemption of the S$100mn MTN. In order to incentivize the note holders to approve the proposal, Geo will grant a consent fee of 0.5% for early acceptance. It is only 7 months away from the expiry of the note, but the Group is willing to pay it back in advance even with extra compensation.
The covenants of the MTN restrict the Group to refinance from other borrowings under normal circumstances. Once the redemption is completed, it will free up room to refinance so as to fund the business expansion via acquisition and establishment of more sales channels.
Since the management reiterated eyeing on long-term growth, the motive is to pave the path to build the future.
Looking ahead, Geo will have more than US$100mn outlays this year, out of which around c.US$70mn for MTN repayment, and the rest is for TBR acquisition and other CAPEX.
Based on our forecast, the group is capable of paying this up but retains a small amount of cash.

News to restrain on the import of lower grade coal into China was back in May-17. The preliminary target is to decrease the volume from overseas by 5% to 10% YoY in FY17.
According to General Administration of Customers of PRC, the total volume of imported thermal coal arrived at 97.65mn tonnes in FY16.
The cooling measures comprise of the mandate on the power companies to reduce the volume of imported coal for new or pending contracts, subsidising domestic lower grade coal producers and power plants, and imposing quality control on imported coal.
The contingent policies aim to balance the domestic coal supply and demand in order to subdue the upswing of thermal coal price which is expected to pressurise power companies especially when peak season is due in summer. ICI 4,200GAR is trading at c.US$37/tonne currently compared to c.US$42/tonne in Apr-17.
The recent correction of thermal coal price was expected to be short-term. Because most of the coal mines in China are underground and subjected to higher production costs. The lower coal price will drive out those inefficient mines. Subsequently, the domestic supply will fall again. Coal will display the ongoing resiliency.

The policy risks are expected to impact more on price side rather than sales volumes for Geo. Geo’s sales are c.78% exposed to China market currently, it does not trade directly with end buyers.
ECTP, the trading house, has secured 7mn tonnes purchase (70% of the annual sales target) from Geo this year. It will divert some of the coal earmarked for China into other countries. The group is expected to receive compensation if ECTP defaults on the offtake agreement.
Geo’s goal is not bound to China solely, it is also shipped to India and ASEAN, especially Indonesia domestic market. Therefore sales channels are not to be stuck even China narrows the portal.
Management guided that the 10mn tonnes of sales target is still on track, and the group has been actively seeking more reach to Indonesia domestic demand.

We maintain the unchanged forecast of 8.5mn tonnes of coal sales volume with US$37/tonne average selling price (ASP) in FY17.
Due to the probably early redemption of MTN, the mild drop in finance costs will improve the net profit slightly from previous forecasted US$41mn to updated US$42mn.
Based on unchanged PER of 11x, we maintain our TP of SG0.45 for FY17.

Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2017-05-25

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