Sky One Holdings

UOBKayhian on 8 Oct 2012

What’s New
— Emerging integrated coal company. Sky One (Sky) announced on 28 September that it entered into a conditional sales and purchase agreement to acquire 100% of Energy Prima (EP).
Stock Impact
·      Purchase details. Sky's purchase consideration for EP will be satisfied by the issue of 1.6b new Sky shares at S$0.25/share, valuing EP at S$400m. This valuation was based on arm's length negotiation with reference on internal estimates of the NPV of EP's future cashflow. In addition, the vendors could be allocated an additional 600m new Sky shares should certain profit targets or proven resources (through a technical report) be delivered up to 2016. These targets are: a) net profit of US$30m or 30m tonnes of coal resources in 2014, b) US$40m or 40m tonnes in 2015, and c) US$50m or 50m tonnes in 2016.
·      Details on EP Concession. EP has an 80% stake in a coal mine concession on 1,933 hectares of land in East Kalimantan, Indonesia. The explored area is approximately 283.5 hectares (about 15% of the total). No details were provided but based on the 2014 target for the vendor of 30m tonnes of coal resource, we estimate a potential valuation range of S$983m to S$1,421m for EP’s concession. This is based: a) valuation of US$10-17/MT of reserve based on comparable valuation of coal peers and b) total reserves of 103m. The latter assumes 50% of resources will translate to measured reserves and the 2014 target of 30m resources applies to only 15% of the total concession. We have assumed this as only 15% of the concession has been explored and further exploration and technical studies are likely to result in higher reserves for this concession. Using the potential valuation range for EP, the implied fully-diluted valuation for Sky works out to be S$0.37-0.54/Sky share. There could be further upside as this estimate does not include the value of Sky’s existing coal logistic business.    
·      New owners; new growth potential. The issue of 1,600m new shares will result in the entry of new major shareholders as the vendors of EP will own 83.6% of Sky. In our view, this is a synergistic acquisition as the coal mine concession will complement its existing coal logistics division. In addition, Sky’s existing businesses (express land transport and airfreight divisions) have seen falling profitability and the new direction of being an integrated coal company could potentially drive Sky to new heights. 
Valuation
·      Waiting for more details. At this stage, the limited details on the conditional S&P will mean valuing the group will be challenging. In addition, the proposed acquisition is still subject to several conditions including due diligence on EP, waiver of an obligation to the vendor to undertake a mandatory general offer, etc. Nevertheless, we think the group may bear a closer watch given its evolvement into an integrated coal company.