Singapore Coal Monthly - Phillip Securities 2018-03-28: A Deeply Undervalued Sector

Singapore Coal Monthly - Phillip Securities 2018-03-28: A Deeply Undervalued Sector Singapore Coal Sector Stocks GOLDEN ENERGY & RESOURCES LTD AUE.SI GEO ENERGY RESOURCES LIMITED RE4.SI

Singapore Coal Monthly - A Deeply Undervalued Sector

What Is The News?


  • In Mar-18, the authority announced the Government Work Report for 2018, part of which directs the ongoing supply-side reform. According to the report, China will cut down steel and coal capacity by 30mn tonnes and 150mn tonnes respectively in 2018. 
  • Meanwhile, it will shut coal-fired plants with a capacity of less than 300k KW that fail to meet emission standards in 2018.


  • In Mar-18, the Minister of Energy and Mineral Resources (MEMR) announced a price cap of coal sales to electricity sector for public interest. The price is fixed at US$70/tonne (on FOB basis), with standard specification of 6,322kcal/kg GAR, total moisture 8%, total Sulphur 0.8% and ash 15%. 
  • In principle, the adjustment formula is the formula to determine HPB (the benchmark coal price), where the prevailing HBA (coal price reference that becomes the baseline of HPB) is fixed at US$70 if the prevailing HBA is higher than or equal to US$70. If the applicable HBA is lower than US$70, the adjustment formula shall use the prevailing HBA as the baseline.

Domestic capacity cut and even more reliant on imported coal 

  • In 2017, China phased out 183mn tonnes of coal capacity, which outperformed the target of 150mn tonnes set in early 2017. The total coal capacity eliminated during 2016 and 2017 amounted to c.500mn tonnes. If the authority manages to achieve the target this year, it is expected to complete the 800mn tonnes of capacity reduction ahead of the 13th Five-Year Plan (from 2015 to 2020). 
  • China’s power demand remains relatively strong growth in Jan/Feb-18 (Thermal power: 4% y-o-y, Hydro: 11%), compared to a flat domestic coal production. Accordingly, the demand gap was filled by the imported coal whose volume jumped 43% and 76% y-o-y in respective Jan/Feb-18. 
  • We expect the demand for imported coal will continue to grow given the ongoing curtailment of domestic production will result in a supply short.

Indonesia coal prices close to 6-year highs 

  • The HBA reached US$101.86/tonne (+24.4% y-o-y and 1.2% m-o-m), surpassing the peak of US$101.69/tonne in Dec-16. According to the new pricing formula, coal producers or trading companies will be subject to an average 30% discount of the current spot price, which is a disincentive for domestic coal sellers. 
  • It is expected that most coal producers or trading companies will shift more sales to overseas markets after fulfilling the basic requirement of supplying 25% of annual production to domestic market. 
  • The total volume of exported coal accounted for 77.4% of total production in 2017. Hence, the new policy could drive percentage higher moving forward. Furthermore, it could cool down the sentiment of investment in the coal sector.

Coal counters monthly updates 

Golden Energy and Resources (Target price: S$0.48 / BUY) 

  • FY17 production arrived at 15.6mn tonnes (+64.2% y-o-y).
  • Secured 13 offtake agreements for 15mn tonnes of coal sales in FY18.
  • Sales target in FY18 will be 20mn tonnes.
  • Cash position reached US$189mn as of Mar-18.

Geo Energy Resources (Target price: S$0.44/ BUY) 

  • FY17 production arrived at 7.7mn tonnes (+40% y-o-y).
  • Secured an offtake agreement with ECTarget Price for 7.5mn tonnes coal supply in FY18.
  • Sales target in FY18 will be 11 to 12mn tonnes.
  • Cash position reached US$262mn as of Dec-17.

Investment Action

  • After the FY17 results, the prices of the two counters still moved sideways despite buoyant coal prices. We believe it was due to the migration of market sentiment towards clean energy investments. However, apart from higher production guidance, we look forward to the potential M&As that will be conducted by these two undervalued companies respectively since they both issued notes to accumulate more war chest over the past few months. 
  • Based on the outlook for a healthy demand and stable price, as well as the ramp-up of production in FY18 (Golden Energy & Resources GEAR: +29% y-o-y, GEO Energy Resources GEO: +43% y-o-y), we maintain our BUY rating on coal sector.

Chen Guangzhi Phillip Securities | https://www.stocksbnb.com/ 2018-03-28
Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 0.480 Same 0.480
BUY Maintain BUY 0.470 Same 0.470