Geo Energy Resources Ltd - Phillip Securities 2017-12-18: High Growth With 4% Yield

Geo Energy Resources Ltd - Phillip Securities 2017-12-18: High Growth With 4% Yield GEO ENERGY RESOURCES LIMITED RE4.SI

Geo Energy Resources Ltd - High Growth With 4% Yield

  • Production is expected to surge 41.8% YoY in FY17. We expect volumes to continue to grow by 41% YoY to 11mn tonnes in FY18.
  • Removed financing overhang with new $300mn senior note facility.
  • Attractive dividend yield of 4%. Maintain BUY with target price of S$0.44 



BACKGROUND

  • Geo Energy Resources Ltd (GEO) is an Indonesian coal producer. Its main business segments comprise of coal mining, coal trading, and related mining services. 
  • As of Sep-17, the group has six mining concessions with more than 90mn tonnes coal reserves.


INVESTMENT MERITS / OUTLOOK 


1. Substantial growth in production. 

  • 9M17 sales volume at grew 76.6% YoY to 5.6mn tonnes. During the period, the realised average selling price rose by 37.8% YoY to US$39.5/tonne. The coal price (ICI 4,200 GAR) remains on an uptrend, touching year highs of c.US$50/tonne in Nov-17. 
  • Management revised down the sales target to 7mn to 8mn tonnes from 10mn tonnes set previously due to the disruption of prolonged monsoon season in 2Q and 3Q17; this is still a growth of 41.8%.

2. Issuance of the new note enhanced solvency and liquidity. 

  • Geo Energy Resources issued a new senior note of US$300mn in early Oct-17 at an interest rate of 8%. The proceeds were used to partially redeem the S$100mn (US$72mn) MTN which will be due in Jan-18 and repay the advances from ECTP. 
  • The balance of roughly US$200mn, together with the cash on hand of US$36mn as of Sep-17, will fund working capital or to fund potential acquisitions of coal mining assets.

3. Attractive dividend yield in the sector. 

  • We expected Geo Energy Resources to maintain dividends of 1 SG cents (4% dividend yield). We think there is upside on the dividends.

4. GEO guiding production target will range from 12mn to 15mn tonnes in FY18. 

  • For FY18, we expect volumes to be 11mn tonnes with 41% YoY growth and ASP to be US$39/tonne (US$41/tonne FY17e). 
  • At present, the group is offered three proposals of offtake agreements for TBR mine, and the prepayment price of which will be at least US$4/tonne, comparable to the offer for SDJ mine in FY16. If it pans out, the new off-take will provide more visibility to production volume and further improve the cash position.


RECOMMENDATION


Maintain BUY with a target price of $0.44. 

  • We expect earnings to surge in FY17e from coal sales volume of 7.8mn tonnes (+41.8% YoY) and ASP of US$41/tonne (+24.2%). Based on the forward PER of 10.0x (the average of regional peers), we maintain our BUY call with a target price of S$0.44







Chen Guangzhi Phillip Securities | http://www.poems.com.sg/ 2017-12-18
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 0.440 Same 0.440



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