SINGAPORE (Sept 11): KGI is initiating a “buy” rating on Geo Energy Resources (GEO), the coal mining company, with a fair value price of 36 cents.
In a Monday report, analyst Joel Ng says, “Our fair value is an implied 6.4 times FY17 forward earnings and 5.0 times FY18 forward earnings, a 25-40% discount to its larger-sized peers.”
The analyst believes that the discount is fair given the group’s coal reserves are about four to 10 times smaller than other Indonesian coal miners.
The analyst’s rating comes on the back of the group’s increased total reserves of 95 million tonnes after the recent acquisition of PT Tanah Bumbu Resources (TBR), a mining concession next to its existing PT Sungai Danau Jaya (SDJ) coalmine in South Kalimantan.
The coal industry showed signs of a recovery in late 2016. This contributed to an increase in GEO’s 1H17 net profit to US$24.6 million ($33 million) from US$35,000 a year ago, as coal production in its SDJ mine increased.
GEO had partnered PT Bukit Makmur Mandiri Utama (BUMA), an Indonesian mining contractor, to help mitigate operational risks on the production side.
On the demand side, GEO is mostly covered by an offtake agreement with Engelhart Commodities Trading Partners (ECTP) for the delivery of at least 7 million tonnes in FY17, which makes up for 70% of the group’s FY17 target production.
The group is currently planning offtake arrangements for its TBR mines in FY18, which management expects to announce in 4Q17.
“Its current coal reserves is able to support a production schedule for the next seven years based on our assumptions of 9 million tonnes in FY17 and 13 million tonnes per year from FY18 to FY23,” says Ng.
Based on the analyst’s assumptions, the group will yield a total of 87 million tonnes of coal mined until FY23, which he believes is a conservative estimate that is well below the group’s current 95 million tonnes of coal reserves.
Shares in GEO closed at 25 cents or 4.4 times 2017 core forward earnings. The stock has a dividend yield of 5.2%.
