Sakari Resources

OCBC on 31 Oct 2012

Sakari Resources posted 3Q12 revenue of US$270.4m, +21% YoY and 14% QoQ, aided by higher production at both its mines at Sebuku and Jembayan. Despite the lower coal ASPs, better efficiency led to an improvement in operating margins; but it was a tax credit of US$31m which led to its net profit jumping 52% YoY and 135% QoQ to US$56.3m. However, if we strip out the tax credit, we estimate that core earnings would have come in at around US$25.3m, or down 32% YoY (+6% QoQ). Separately, PTT has increased its stake to 90.2% by the end of the offer on 22 Oct. However, PTT has not acquired sufficient shares and acceptances to enable it to proceed with a compulsory acquisition of the remaining shares. But in light of the reduced liquidity, we are ceasing coverage on the company.

3Q12 earnings boosted by tax credit
Sakari Resources posted 3Q12 revenue of US$270.4m, +21% YoY and 14% QoQ, aided by higher production at both its mines at Sebuku and Jembayan. Despite the lower coal ASPs (US$83.7/ton versus US$94.5 in 2Q12), better efficiency (lower cash cost) led to an improvement in operating margins; but it was a tax credit of US$31m which led to its net profit jumping 52% YoY and 135% QoQ to US$56.3m. However, if we strip out the tax credit, we estimate that core earnings would have come in at around US$25.3m, or down 32% YoY (+6% QoQ). 9M12 revenue came in at US$697.2m, meeting 75% of our FY12 forecast, while core net profit would be around US$63.7m, or 74% of full-year estimate.

Near-term outlook remains muted
Although both its mines are on track to hit their production targets this year, management notes that the near-term coal sentiment remains weak as global growth forecasts are revised down. Supply is also moderating significantly at this time as most coal mining operations have curtailed production in response to stagnant demand and weaker pricing levels. As a guide, international coal prices fell 7% QoQ in 3Q12. Nevertheless, Sakari will continue to target improvements in both its operating performance and coal control measures to maximize margins in the current tough pricing conditions. 

PTTML has 90.2% stake in Sakari Resources
Separately, PTTML (PTT Mining Limited) has increased its stake to 90.2% by the end of the offer on 22 Oct. However, PTT has not acquired sufficient shares and acceptances to enable it to proceed with a compulsory acquisition of the remaining shares. As such, the company notes that PTT is still evaluating its position and has not made any decision to lift the suspension of trading in Sakari shares. 

Ceasing coverage
But in light of the reduced liquidity (free float in the market), we are ceasing coverage of the company.

Sakari Resources Limited

OCBC on 28 Aug 2012

Sakari Resources Limited (SRL) announced yesterday that PTT Mining Limited (PTTM) – a wholly owned subsidiary of PTT International – has made a mandatory conditional cash offer at S$1.90/share for all the shares in SRL that it does not already own. As the offer is also some 31% above our previous DCF-based fair value of S$1.45, we think that shareholders should ACCEPT THE OFFER, especially in light of the still uncertain longer-term outlook for global coal prices. In addition, we do not expect a competing bid as PTT group already owns such a large stake.

Cash offer at S$1.90/share
Sakari Resources Limited (SRL) announced yesterday that PTT Mining Limited (PTTM) – a wholly owned subsidiary of PTT International – has made a mandatory conditional cash offer at S$1.90/share for all the shares in SRL that it does not already own. The PTT group, which already owns some 46.43% of SRL, says its offer is in line with its strategy to increase its presence in the minerals and energy sector and further diversify its resource base and income streams.

Conditional on PTTM owning >50% of SRL
The offer is conditional on PTTM receiving valid acceptances, when taken together with its current stake that will see it owning more than 50% of the maximum potential issued shares in SRL. And in the event that the free-float of SRL falls below 10% as at the close of the offer, PTTM does not intend to maintain the listing status of SRL. However, PTTM reserves the right to re-evaluate its position, depending on the ultimate level of acceptances received and the prevailing market conditions.

Attractive premium of 39% to 1-month VWAP
The offer price of S$1.90 represents a premium of 27.5% to its 24 Aug close; 34.9% to the 1-month volume weighted average price (VWAP); 39.1% to 3-month VWAP; and 23.1% to 6-month WAP. We note that the last time SRL’s share price was around S$1.90 was on 8 May 2012; since then, it has fallen 39% to a low of S$1.16, likely spooked by uncertain outlook for global coal prices.

Accept the offer
As the offer is some 31% above our previous DCF-based fair value of S$1.45, we think that shareholders should ACCEPT THE OFFER, especially in light of the still uncertain longer-term outlook for global coal prices. In addition, we do not expect a competing bid as PTT group already owns such a large stake.

Sakari Resources

CIMB Research on 27 Aug 2012

Major shareholder PTT has launched an offer for Sakari Resources (SAR) at S$1.90 per share. We deem this an attractive exit opportunity for shareholders as weak earnings prospects imply prolonged share price sluggishness if not for this offer.

The offer price is attractive, representing a 28 per cent premium over Friday's close and 9 per cent premium over SAR's 52-week volume weighted average price.

We advocate accepting the offer and expect the share price to rise to S$1.90 once trading resumes.

We align our target price to the offer price as we do not anticipate a competing bid. Maintain "underperform".

PTT Mining (a wholly owned subsidiary of PTT International, a Thai energy conglomerate) which owns 45 per cent of SAR, has offered to buy the outstanding shares of SAR for S$1.90 per share.

PTT plans to delist SAR if it can successfully acquire at least 90 per cent of free float.

The offer price is fair, translating into 15x CY2012 PE vs the stock's 14x historical average since its 2006 listing.

The offer price is also generous compared to our previous S$1.00 target price (9x CY2013 P/E, one standard deviation below its three-year mean).

We deem this an attractive exit opportunity as poor earnings prospects imply few re-rating catalysts in the medium term if not for this offer.

Faced with falling average selling prices and persistent cost pressure, SAR's profits and dividends are expected to decline in FY2013. The share price has already fallen 44 per cent over the last six months, reflecting poor fundamentals.

Accept the offer. The offer presents an attractive exit opportunity in the absence of fundamentally-driven catalysts. We do not foresee a competing bid given that PTT already owns 45 per cent of SAR.

UNDERPERFORM

Sakari Resources

OCBC on 1 Aug 2012

Sakari Resources Limited (SRL) posted a decent improvement in 2Q12. 1H12 revenue met 49% of our FY12 forecast, while net profit met 64% of our full-year estimate. Higher sales volume, steady ASPs and improved cash costs were the key reasons behind the better-than-expected showing. We are upgrading our FY12 earnings estimate by 42% as SRL is likely to achieve the lower end of its US$85-90/ton ASP guidance for this year. However, with current global coal prices already below its ASP guidance, a prolonged slump could affect FY13 performance. With the current undemanding valuation, we maintain our HOLD rating and S$1.45 fair value.

Decent QoQ improvement in 2Q12
Sakari Resources Limited (SRL) saw 2Q12 revenue rebounding 5.4% YoY and 26.1% QoQ to US$238.0m, boosted by higher production and steady ASPs of its thermal coal. While net profit fell 38.5% YoY to US$23.9m, it also represented a 65.6% QoQ improvement. For 1H12, revenue fell 8% to US$426.8m, meeting 48.7% of our FY12 forecast, while net profit declined 57% to US$38.4m, or 63.5% of our full-year estimate. SRL retained its 60% payout ratio by declaring an interim dividend of US$0.02/share, versus US$0.0424 a year ago.

Operational ramp-up as previously guided
Coal production at Jembayan was up 42.6% QoQ after SRL brought forward the opening of two new pits. Aided by lower fuel cost, cash cost in Jembayan improved 14.7% QoQ to US$57.60/ton. But SRL does not expect any significant reduction from current cost levels in 2H12. Sebuku production also increased by 29.5%, but cash cost was stable at US$42.70/t due to higher costs associated with mud handled negating savings from improved economies of scale.

Keeps US$85-90/t ASP guidance
After achieving an ASP of US$94.50/t (versus US$94.8/t in 1Q12), SRL is maintaining its US$85-90/t guidance for 2012, despite weak international coal prices. This is because SRL has concluded pricing on ~80% of its target 2012 production at an average of US$90/t. Meanwhile, it has reduced its capex guidance to US$80-100m, down from the previous US$150m, given the still muted global economic outlook.

HOLD with S$1.45 fair value
While we are bumping up our FY12 earnings by 42% due to higher margin assumptions, we are paring our FY13 earnings by 18% on a more muted outlook for coal prices. Current prices are ~US$83/ton, or 8% below SRL’s average contracted price. Hence, a prolonged slump in coal prices could affect performance in 2013 since production and prices are still unfixed. With the current undemanding valuation, we maintain our HOLD rating and S$1.45 fair value.

Sakari Resources

DMG Research on 31 July 2012

Q2 2012 profit after tax and minority interests was down 39 per cent yoy to US$24 million on the back of 0.2 per cent y-o-y decline in top-line to US$238 million, further dragged down by an 8 per cent y-o-y increase in cost of sales to US$183 million and a 60 per cent y-o-y increase in tax (though this includes a one-off US$4.2 million for prior years' taxes) to US$23 million. Other gains of US$8.3 million in Q2 2012 helped offset the decline. Management was to hold a results conference call on July 31, during which revisions on guidance could be made. We maintain our "buy" rating and target price of $2.00 based on 15.5 times FY2012 PE. An interim dividend of two US cents per share has been declared.

Sebuku's production was strong in Q2 2012, with production up 138 per cent y-o-y to 672Kt. Cash costs were down 23 per cent y-o-y to US$42.70 per tonne. With H1 2012 production accounting for 48 per cent of our FY2012 forecast of 2.5 million tonnes, we see strong possibility of Sebuku beating our production forecasts.

Jembayan's production was down 12 per cent y-o-y to 2,069Kt. H1 2012 production now accounts for 39 per cent of our FY2012 estimate. We continue to expect Jembayan to experience sequential ramp-up in volumes. What was notable was that Jembayan's cash costs were down 15 per cent q-o-q to US$57.6 per tonne.
BUY

Sakari Resources

DBS Group Research on 2 Jul 2012

WITH the revision in our average coal price assumptions for FY2012/2013 by about 10-15 per cent to US$100/ton, we cut our FY2012/2013 earnings estimates by 25-28 per cent, given the high sensitivity of SAR's earnings to coal prices.

However, spot coal prices should find a floor at US$80/ton and we expect a mild recovery in coal prices in H2 2012 from current lows, as government policies spur growth in China and as high-cost coal producers in countries like Australia, US and South Africa limit their exports.

Increasing production is not the priority, producing smartly is more important. Given finite coal reserves, producing more in a low price environment may not be ideal over the long term.

Hence, management should retain flexibility in managing production levels, especially at Jembayan, where margins will be tight at current spot prices owing to high cash costs. Production can be increased if coal prices rebound. Sebuku mine, with its higher-grade coals and low cash costs, remains very profitable even at current prices and should be the key driver for SAR's profitability in the near term.

SAR's share price has declined close to 50 per cent from its peak in 2012 and has priced in much of the impact of coal price weaknesses on earnings. At current share price of $1.35, we reckon the market is already pricing in another US$5/ton decline in coal prices from the current level of US$83/ton. Hence downside risk is limited at the current share price, and we expect a short-term rebound in share prices in anticipation of coal prices bouncing off current lows.

Cut TP to S$1.80 but maintain "buy".
BUY

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.

Sakari Resources

OCBC on 2 May 2012

Sakari Resources Limited (SRL) reported 1Q12 revenue slumping 16% YoY to US$188.8m, or just 17% of our full-year forecast, mainly due to sharply lower coal production volume. Net profit tumbled 65% YoY to US$14.5m, meeting just 7% of our FY12 estimate. But management notes that there were several operational factors which affect its performance and things should start to normalise over the year. As such, it remains relatively confident that it can post a recovery from 2Q12 onwards. But we still need to cut our FY12 estimates for revenue by 11% and earnings by 41% (FY13 by 4% and 17% respectively). This in turn lowers our DCF-based fair value to S$2.29. But in view of the likely improvement from 2Q12 onwards, we maintain our BUY rating.

Dismal 1Q12 results
Sakari Resources Limited (SRL) reported a dismal set of 1Q12 results, with revenue slumping 16% YoY and 40% QoQ to US$188.8m, meeting just 17% of our full-year forecast, mainly due to sharply lower coal production volume. Coal production fell 30% YoY and 19% QoQ, hit by bad weather conditions at Jembayan. And also because of higher fuel cost and poorer strip ratios, net profit tumbled 65% YoY and 80% QoQ to US$14.5m, meeting just 7% of our FY12 estimate. But management noted that the quarter also included several one-off items amounting to nearly US$7.5m.

Things should start recovering from 2Q12
And because of the continued bad weather at Jembayan, SRL also brought forward the opening of two new pits there, resulting in higher cash costs (US$67.5/ton) in the quarter. But management believes that Jembayan is set to return to more normal operating metrics over the year. As such, it remains confident that it can achieve a cash cost of low- to mid-US$60/ton this year with an expected output of 9m tons of coal. On the other hand, the Sebuku mine has performed in line with all targets in 1Q12, with cash costs hovering around US$42.5/ton; and this should ease towards US$40/ton this year on an expected production volume of 2.5m tons. On the pricing front, management believes that coal prices are close to reaching a floor at around US$100/ton; and continues to expect its ASPs to hover around US$85-90/ton for this year.

Maintain BUY with lower S$2.29 fair value
Incorporating the latest developments, we cut our FY12 estimates for revenue by 11% and earnings by 41% (FY13 by 4% and 17% respectively). This in turn lowers our DCF-based fair value to S$2.29. But in view of the likely improvement from 2Q12 onwards, we maintain our BUY rating.

Sakari Resources

OCBC on 16 Feb 2012

Sakari Resources Limited (SRL) posted a strong set of 4Q11 results, with revenue jumping 42.4% YoY and 40.4% QoQ to US$312.6m, aided by higher ASPs of coals sold in the quarter. Net profit was up 139.0% YoY and 97.3% QoQ at US$73.0m. For the full-year, revenue climbed 30% to US$1,013.6m, or 7.4% above our forecast, while net profit surged 116% to S$190.3m, or 17.9% above our estimate. Continued production growth at Sebuku will be central to management’s plan in 2012; and SRL remains upbeat about thermal coal demand. Following the strong 4Q11 results and latest output guidance for 2012, we have fine-tuned our estimates. This in turn bumps up our DCF-based fair value to S$2.76 (S$2.06 previously). Coupled with an expected dividend yield of 5%, we upgrade our call to BUY.

Strong 4Q11 results
Sakari Resources Limited (SRL) posted a strong set of 4Q11 results, with revenue jumping 42.4% YoY and 40.4% QoQ to US$312.6m, aided by higher ASPs of coals sold in the quarter. Net profit was up 139.0% YoY and 97.3% QoQ at US$73.0m, as sales of higher-value coal from Sebuku’s Northern Leases helped to lift ASP to US$100/ton. FY11 revenue climbed 30% to US$1,013.6m, or 7.4% above our forecast, while net profit surged 116% to S$190.3m, or 17.9% above our estimate. Meanwhile, SRL is continuing with its policy of paying 60% of its net profit as dividend – this by declaring a final dividend of 5.83 US cents, bringing the total to 10.07 US cents for FY11.

Mining starts at Northern Leases
Sebuku saw coal mined jump 42.6% YoY and 124.3% QoQ to 833k tons in 4Q11; Northern Leases alone contributed 350k tons of product. For this year, SRL further expects Sebuku’s output to increase from 1.8m tons to 2.5m tons; adds that it will be central to its plans for 2012. But Jembayan saw coal mined falling 25.8% YoY and 14.4% QoQ to 1,925k tons. And Jembayan’s output is likely to remain sluggish at 9-9.5m tons this year, versus 8.9m in 2011; but should pick up in 2H12 as new pits come online.

But cash costs could remain high
While management believes that the demand for thermal coal demand looks set for continued growth, it also expects energy prices to remain relatively high, including input fuel prices. As such, cash costs for Jembayan could edge up further from US$57.5/ton in 2011 to above US$60/ton due to elevated strip ratios in 1H12. SRL also expects cash costs for Sebuku to remain around US$40/ton.

BUY with S$2.76 fair value
Following the strong 4Q11 results and latest output guidance for 2012, we have fine-tuned our estimates. This in turn bumps up our DCF-based fair value to S$2.76 (S$2.06 previously). Coupled with an expected dividend yield of 5%, we upgrade our call to BUY.