Geo Energy Resources Ltd - Phillip Securities 2019-03-25: Lacklustre Outlook In 2019

GEO ENERGY RESOURCES LIMITED (SGX:RE4)

Geo Energy Resources Ltd - Lacklustre Outlook In 2019

GEO ENERGY RESOURCES LIMITED (SGX:RE4)'s 4Q18 revenue and net profit missed our expectations due to lower production volume and ASP.
We lower our FY19e sales volume to 8mn tonnes (previously 10mn tonnes) and revise down the ASP to US$40.2/tonne (previously US$41/tonne). Meanwhile, we lower the cash cost to US$29.5/tonne (previously US$30/tonne). Accordingly, FY19e EPS is cut to 1.6 US cents (previously 3.3 US cents).

Based on an unchanged forward PER of 10x (average of regional peers) and the exchange rate (USD/SGD) of 1.35, we downgrade to ACCUMULATE recommendation with a lower target price of S$0.215 (previously S$0.245).

In 4Q18, the average stripping ratio (SR) for SDJ mine dropped to 1.4 (3Q18: 3.0, 4Q17: 4.6). The full-year SR is 2.9, compared to 3.7 in FY17.
On the other hand, the average SR for TBR mine which has been producing since Jul-18 dropped to 1.1 in 4Q18 (3Q18: 3.6), and the full-year SR is 2.4. The average cash cost of the overall production arrived at US$29.6/tonne in 4Q18 (down 1.3% y-o-y).

GEO Energy Resources has submitted a non-binding offer for a brownfield coal mine (high-CV coal) in East Kalimantan. If the deal pans out, GEO Energy Resources’s production could double.

The full-year production met the downward-revised target (7mn to 8mn tonnes) in FY18. However, the FY19 output guidance is flat (8mn tonnes) with 3mn and 5mn tonnes of production from SDJ and TBR mine respectively. The lower target is attributable to a cut in quota from the authorities.

Both production/sales volume and ASP dropped in 4Q18. The average ICI 4,200 GAR plunged by 19.3% q-o-q and 26.7% y-o-y to US$33.5/tonne. The market price rout was due to the restriction on coal imports in China. Production and sales slowed down due to the collapse in margins or cash profit.

Recently, the thermal coal prices rebounded due to the mine accident in China in Jan-19. However, the upside to coal prices will be limited as the seasonally weaker season is coming soon and the restriction on coal imports remains in China. There is little room for the group to grow the top line and bottom line given an expected slight improvement of output and a lower ASP.
The catalyst is the potential deployment of cash and the increment of cash flows generated from any newly-acquired mine (assume the acquisition is completed). The longer the group delays completing a deal, the larger the drag on earnings from the interest expenses borne from their 8% US$300mn bond.

We lower forecasted sales volume to 8mn tonnes (previously 10mn tonnes) and revise ASP to US$40.2/tonne (previously US$41/tonne) for FY19e.
Meanwhile, we revise the cash cost to US$29.5/tonne (previously US$30/tonne). Accordingly, FY19e EPS is cut to 1.6 US cents (previously 3.3 US cents).
Based on an unchanged forward PER of 10x (average of regional peers) and the exchange rate (USD/SGD) of 1.35 we downgrade GEO Energy Resources to ACCUMULATE recommendation with a lower target price of S$0.215 (previously S$0.245).

Chen Guangzhi Phillip Securities Research | https://www.stocksbnb.com/ 2019-03-25

SGX Stock Analyst Report ACCUMULATE DOWNGRADE BUY 0.215 DOWN 0.245