Sakari Resources

OCBC on 1 Jun 2012

Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results. We believe that the continued fall in global coal prices have also spooked investors, especially since coal prices have also fallen below what management had earlier believed to be the floor of around US$100. In view of the grimmer outlook, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%). And as we are also expecting to only see a gradual recovery in coal prices over the next few years at best, our DCF-based fair value also falls from S$2.29 to S$1.45. Downgrade our rating from Buy to HOLD as valuations currently are not demanding. We would consider collecting around S$1.30.

Tumble in stock price
Sakari Resources Limited (SRL) saw its share price taking a big hit, falling some 31% after reporting a dismal set of 1Q12 results; this despite the management assuring investors that things should start to improve from 2Q12 onwards. Instead, investors are likely spooked by the continued fall in coal prices as the situation in Europe becomes increasingly uncertain; a major coal producer in the US has also expressed a pretty muted outlook .

Coal prices below US$100
According to Bloomberg data, the Newcastle coal futures prices have now fallen below the 3.5-year average (refer to Exhibit 1) to hit US$91.7; it has also fallen some 34% from its high in early 2011. More importantly, we note that the coal prices have also fallen below what management had earlier believed to be the floor of around US$100. And if coal prices continue to remain depressed or drift lower, this would further jeopardise the company’s targeted ASP of around US$85-90/ton for this year.

Price-sensitive earnings
In light of the tumble in global coal prices and also the increased uncertainty in Europe, we deem it necessary to further pare our coal price assumption by 10% to US$76/ton. And because cash cost is unlikely to fall as fast, margin compression is likely to kick in quite sharply. As such, we cut our FY12 earnings forecast by 48% even though the cut in revenue is only 10% (FY13F earnings by 23% and revenue by 5%).

Lowering fair value to S$1.45
And as we are also expecting to only see a gradual recovery in coal prices over the next few years at best, our DCF-based fair value also falls from S$2.29 to S$1.45. Downgrade our rating from Buy to HOLD as valuations currently are not demanding. We would consider collecting around S$1.30.