Golden Energy & Resources - RHB Invest 2017-05-18: Sizable Increase In Production To Continue

Golden Energy & Resources - RHB Invest 2017-05-18: Sizable Increase In Production To Continue GOLDEN ENERGY AND RESOURCESLTD AUE.SI

Golden Energy & Resources - Sizable Increase In Production To Continue

  • We initiate coverage on GEAR with a TP of SGD0.71 (63% upside), implying 14.7x FY17F and 12.4x FY18F P/Es respectively. 
  • It booked strong 1Q17 coal production of 3m tonnes (47.8% YoY) and we believe that there would be continued growth, after appointing two coal industry veterans to the board of directors of Golden Energy Mines earlier this year. 
  • One of them, Mr Raden Utoro, had been instrumental in increasing the coal production of KPC – a coal mining company with one of the world’s largest open-pit mining – to > 60 mtpa from 2 mtpa.

Large coal reserve supports its plan to ramp up production. 

  • GEAR is one of the largest thermal coal reserve owners in Indonesia, with 2bn tonnes of thermal coal resources and 780m tonnes of thermal coal reserves as at 31 Dec 2016. 
  • Most of its coal production, coal reserves and earnings come from BIB, with its coal mine sites located in South Kalimantan.

Stellar 1Q17 Performance 

  • GEAR booked a strong 1Q17 coal production of 3m tonnes (47.8% YoY), which is on track to reach its FY17 production target of 14m tonnes of coal. Its 1Q17 net profit attributed to the owners of the company (net of non-controlling interest) grew strongly to USD19m (+1,032% YoY) on the back of: 
    1. Higher coal sales volume from its coal mining of 3.2m tonnes in 1Q17 (+56.6% YoY), which was partially offset by a decrease in coal trading volume to 242,000 tonnes in 1Q17 (-63.2%YoY); 
    2. Higher realised coal selling price of USD40.90 per tonne in 1Q17 (+29.6%YoY).

Sizable ramping up in coal production ahead 

  • Golden Energy and Resources (GEAR) has a track record of increasing its thermal coal production by a CAGR of 32% 2010-2016 to 9.5m tonnes in FY16. 
  • GEAR aims to ramp up its coal production significantly in the years ahead, which would mostly come from a higher coal production in its BIB coal mines. 
  • GEAR plans to increase BIB’s coal production from 7.4m tonnes in 2016 to 13m tonnes in 2018, 22m tonnes in 2020 and 40m tonnes from 2024 onwards.
  • To ensure it meets its coal production targets, GEAR has appointed two coal industry veterans – Mr Bonifasius and Mr Utoro as the president director and director respectively of its 66.9%-owned subsidiary Golden Energy Mines effective 1 Jan 2017. Mr Utoro was KPC’s former chief operating officer was instrumental in increasing that company’s coal production from to > 60m tonnes pa from 2m tonnes pa.

Low cost thermal coal producer 

  • GEAR has a low stripping ratio with the average life of mine stripping ratio at BIB’s concession areas ranging from 3-6x. 
  • According to the independent qualified person’s report and valuation issued by Salva Resources, a global exploration, mining and commodities consultant, the average total operating costs over BIB’s life of mine is USD17.31 per tonne of coal (excluding royalty).

Key shareholders support long-term volume growth 

  • GEAR through its subsidiary Golden Energy Mines has a 25-year off-take agreement to sell up to approximately 217.5m tonnes of coal to its key shareholder, GMR, a leading infrastructure group in India. There is no minimum or maximum off-take price. All sales to GMR are coal index-linked pricing.
  • On top of that, GEAR as part of the Sinar Mas conglomerate, should benefit from the synergy with the other companies under this group. GEAR’s majority shareholder PT Dian Swastatika Sentosa Tbk (DSSA IJ, NR) plans to develop, construct and operate power plants in Indonesia. Therefore, GEAR is likely to supply coal to Dian Swastatika Sentosa in the near future.

Well-Positioned To Benefit From Increasing Coal Demand From Power Plants 

  • GEAR has coal reserves with average calorific value ranging between 3,800 and 6,500 kcal/kg (air-dried basis, or arb) with typical spec of 4,000-4,200 gross as received (GAR) with low ash and low sulphur – the type of coal that is used in power plants.
  • Incoming coal-fired power plants should increase demand for medium and low calorie coal. As of Jan 2017, there were around 569GW worth of coal-fired power plant projects in the world in the pipeline (vs current operating coal-fired power plants of 1,964GW), which translates to 28% growth from current operating coal-fired power plants.

Coal as main source of energy in Indonesia’s energy mix 

  • According to Perusahaan Listrik Negara (PLN), coal would still remain Indonesia’s main source of energy in its energy mix. The contribution of coal to Indonesia’s energy mix would decrease to 50.4% in 2026 (from 55.6% in 2017), however, due to higher consumption growth of other sources of energy against that of coal consumption. 
  • However, coal would still dominate, contributing around 50.4% in 2026.

Beneficiary of increasing domestic demand 

  • There would be a sizable increase in the domestic demand for coal, as Indonesia is in the progress of expanding its electricity capacity. Most of the additional electricity capacity would come from coal-fired power plants. 
  • According to PLN’s Rencana Usaha Penyediaan Tenaga Listrik (Electricity Power Supply Business Plan, or RUPTL) 2017- 2026, there would be additional coal-fired power plant capacity totaling 31.9GW from 2017 to 2026. 
  • The biggest additional capacity is estimated in 2019, with additional coal-fired power plant capacity of 10GW coming on stream.

Financial Forecasts 

Significant increase in sales volume to boost revenue 

  • We forecast GEAR’s revenue to increase by a CAGR of 24.6% (2016-2019F) to USD760.8m in FY19F. This would mostly be on the back of a significant increase in coal sales volume, which we forecast to grow at in FY19 at a CAGR of 21.7% (2016-2019F) to 19.8m tonnes of coal.

Earnings to spike 

  • We think GEAR’s earnings (net of minority interest) should grow at a 2016-2019F CAGR of 80.1%, to USD126.9m in FY19F, following on from higher forecast revenue due to a substantial increase in sales volume and improvement in its profit margins. 
  • We estimate gross margins to stabilise at 40%, and for net margins to rise to 17% in FY19F.


  • We use the DCF approach to derive a TP of SGD0.71, while assuming: i. Beta of 1.25; ii. Risk-free-rate of 2.2%; iii. 8.3% equity risk premium; iv. Debt to capital ratio of 20%; v. Terminal growth rate of 0%.
  • Our DCF-derived TP of SGD0.71 implies FY17F and FY18F P/Es of 14.7x and 12.4x respectively, which we think is justified as we expect its ROAE to increase to more than 20% and with significant forecast production growth ahead.
  • For our DCF valuation, we forecast a 18-year FCF from FY18F-35F, which we discount using a WACC of 10.8% to get the total present value of its FCF. We use a 18-year FCF until FY35F, as BIB’s coal mining licence is to expire in 2036.

Key Risks 

  • There are risks to our operational and financial forecasts, which could impact our resulting estimates, TP and call. 
  • Some of the key risks include: 
    1. Execution risks in ramping up coal production. We use assumptions of coal production growth in line with management’s forecasts. Lower coal production should have an impact on its revenue and earnings. It is such that a 10% lower than expected coal production volume should lead to a EPS decline of 16.0%.
    2. A significant drop in coal prices. Coal prices fluctuate. As the coal price is the selling price of GEAR’s main product, it has a significant impact on revenue, profitability and earnings. GEAR’s earnings are thus sensitive to changes in the coal price, ie, every 10% decrease in coal price should lead to a 18.9% decrease in its EPS.
    3. Weaker-than-expected coal demand. We assume demand for coal to be relatively stable. However, there may be some factors that lead to coal demand that is weaker than our expectations, such as any Government intervention in changing the source of energy, or higher environmental standards on carbon emission. GEAR’s earnings are sensitive to the changes in coal sales volume, such that a 10% decrease in coal sales volume should lead to a EPS decline of 16%.

Singapore Research RHB Invest | 2017-05-18
RHB Invest SGX Stock Analyst Report BUY Initiate BUY 0.71 Same 0.71