Straits Asia Resources 18 Aug 2010

8/9/2019 Straits Asia Resources 18 Aug 2010

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www.dbsvickers.com

Refer to important disclosures at the end of this reported: JS / sa: YM

HOLD S$2.04 STI : 2,923.36Price Target : 12-Month S$ 2.20 (Prev S$ 2.04)Reason for Report : Company UpdatePotential Catalyst: Stronger than expected coal price momentum in 2HAnalystSuvro Sarkar +65 6398 [email protected]

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R e l a t i v e I n d e x

S tr a it s A s ia Re so u r c es ( L HS ) R ela tiv e S TI IN D EX (R H S )

Forecasts and ValuationFY Dec (US$ m) 2008A 2009A 2010F 2011FTurnover 585 748 651 839EBITDA 196 242 144 248Pre-tax Profit 181 219 130 234Net Profit 124 134 91 164Net Pft (Pre Ex.) 124 134 91 164EPS (S cts) 15.4 16.0 10.9 19.6EPS Pre Ex. (S cts) 15.4 16.0 10.9 19.6EPS Gth Pre Ex (%) 335 4 (32) 80Diluted EPS (S cts) 15.4 16.0 10.9 19.6Net DPS (S cts) 7.3 9.7 6.5 11.8BV Per Share (S cts) 46.5 56.6 61.0 68.8PE (X) 13.2 12.7 18.6 10.3PE Pre Ex. (X) 13.2 12.7 18.6 10.3

P/Cash Flow (X) 13.2 12.7 18.6 10.3EV/EBITDA (X) 9.0 7.6 13.5 7.7Net Div Yield (%) 3.6 4.8 3.2 5.8P/Book Value (X) 4.4 3.6 3.3 2.9Net Debt/Equity (X) 0.3 0.3 0.5 0.4ROAE (%) 36.6 31.5 18.5 30.2

Earnings Rev (%): 0.6 0.0Consensus EPS (S cts): 14.2 24.7ICB Industry :Basic MaterialsICB Sector: MiningPrincipal Business: Coal mining company with interests in IndonesiaSource of all data: Company, DBS Vickers, Bloomberg

At A GlanceIssued Capital (m shrs) 1,129Mkt. Cap (S$m/US$m) 2,290 / 1,691Major Shareholders

PTT Asia Paciifc Mining (%) 45.6Bank of New York (%) 6.0legg mason Inc (%) 4.9

Free Float (%) 43.5

Avg. Daily Vol.(000) 5,156

DBS Group Research . Equity 18 Aug 2010

Singapore Company Focus

Straits Asia ResourcesBloomberg: SAR SP | Reuters: STRL.SI

Upside priced in No change to FY10/11 earnings estimates

Possible upside from mine license award, but thiscould be largely priced in

Jembayan reserve upgrade may not be significant

Maintain HOLD, DCF-based TP revised up to S$2.20

2Q10 net profit of US$23m slightly ahead of our

expectations of US$15-20m, as SAR posted higher-than-

expected sales of 2.6m tons of coal from Jembayan mine, drivenby higher production of 2.5m tons and inventory drawdown of

about 0.3m tons. Management continues to guide for 8 - 8.5m

tons annual production at Jembayan in 2010. Sebuku production

continued to be low at 0.2m tons, though we expect sequential

improvement in production in 2H10. While gross ASP of

US$72/ton was within expectations, slightly boosted by higher

prevalent spot prices in 2Q, cash costs at both mines continued to

be high (Sebuku: US$52/ton, Jembayan: US$47/ton).

Sebuku Northern Leases finally but when? That is the

question uppermost in investors minds and recent updates from

management suggest that the in-principle permit for land use is

likely by end-3Q. Adding 3 months for the final permits and acouple of months before mining starts, we are looking at

contribution from mid-1H11. The Sebuku supercharger partly

drives our 80% EPS growth projection for FY11, and hence, any

further delays could lead to downward revision in FY11 numbers.

Valuations not compelling yet. While we revise up our DCF-

based TP to S$2.20 (WACC lowered to 12% in line with lower risk

free rate assumptions for Indonesia),we maintain our HOLD call

on the stock as we think the market has largely priced in the

Sebuku mine license award and SAR's current FY11 PE of 10.4x is

not cheap compared to peers. While we do not rule out share

price upside when the mine license is awarded, a sharp jump

could also provide an opportunity to take profit. The Jembayan

reserves upgrade, to be announced shortly, is unlikely to be a key

catalyst, as we do not expect a big jump in reserves, given that the

coal price assumptions will be revised down from the aggressive

US$100/ ton level previously used.


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Straits Asia Resources

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Straits Asia Resources 2Q10 results summary and comparisonsFYE Dec (US$ mill) 2Q09 1Q10 2Q10 Chg yoy Chg qoqRevenues 175.6 153.5 191.5 9% 25%

Cost of Revenue (94.6) (123.3) (145.0) 53% 18%

Gross Profit 81.0 30.2 46.5 -42% 54%

Operating Income 67.5 20.3 37.9 -44% 86%

Total other non operating (23.7) (3.2) (5.2) -78% 61%

Pretax Income 43.8 17.1 32.7 -25% 91%

Tax (22.4) (5.9) (9.5) -58% 59%

Net Profit 21.4 11.2 23.2 8% 108%

Gross Margin 46.1% 19.7% 24.3%

Operating Margin 38.5% 13.3% 19.8%

Net Profit Margin 12.2% 7.3% 12.1%

OperationalCoal sales volume '000 tonnes 2,101 2,214 2,858 36% 29%

Net ASP - US$/tonne 83.6 69.3 67.0 -20% -3%

Production Cost - US$/tonne 50.2 52.8 54.4 8% 3%

Note: Net ASP represents Gross ASP adjusted for royalty payments

Source: CompanyPeers Comparison TableCompany Mkt Cap(US$b) Price(Local $) PER (x) P/B P/S EV/EBITDA ROE OpgMargin

2009F 2010FIndonesia peersBatubara Bukit Asam 4.2 16450 15.8 11.1 7.0 4.6 10.3 56.2 39.7

Bumi Resources* 3.2 1490 9.2 6.2 1.9 0.9 5.5 14.4 18.2

Indo Tambangraya 4.9 38650 15.5 11.5 6.4 2.9 9.2 48.0 28.9

Adaro Energy 7.3 2050 17.5 12.8 3.6 2.5 7.8 27.8 35.0

Average 14.5 10.4 4.7 2.7 8.2 36.6 30.4

Regional peersYanzhou Coal Mining 12.2 16.52 12.0 10.0 2.4 3.5 7.5 14.7 26.6

China Shenhua Energy 72.1 28.55 13.8 11.4 2.9 4.1 7.6 19.9 39.3

China Coal Energy 19.4 11.14 14.1 11.4 2.0 2.0 7.0 12.8 18.8

Banpu Public Company Ltd* 5.2 608 12.2 9.0 3.2 2.7 10.4 32.0 23.7

Average 13.0 10.4 2.6 3.1 8.1 19.9 27.1

Straits Asia Resources* 1.7 2.04 18.8 10.4 3.5 2.2 10.3 31.5 36.1* based on Bloomberg consensus estimates

Source: Bloomberg, DBS Vickers estimates


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Income Statement (US$ m) Balance Sheet (US$ m)FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011FTurnover 585 748 651 839 Net Fixed Assets 564 702 835 865Cost of Goods Sold (354) (448) (454) (515) Invts in Associates & JVs 0 0 0 0Gross Profit 231 300 197 324 Other LT Assets 67 88 83 79Other Opng (Exp)/Inc (41) (58) (49) (71) Cash & ST Invts 171 57 3 38Operating Profit 190 243 148 252 Inventor 6 32 7 8Other Non Opg (Exp)/Inc 6 (1) (5) (5) Debtors 61 98 85 110Associates & JV Inc 0 0 0 0 Other Current Assets 5 10 10 10Net Interest Ex /Inc 15 23 14 14 Total Assets 874 987 1,023 1,110Exce tional Gain/ Loss 0 0 0 0Pre-tax Profit 181 219 130 234 ST Debt 89 207 1 1Tax (57) (85) (39) (70) Other Current Liab 141 156 104 118Minority Interest 0 0 0 0 LT Debt 199 0 250 250Preference Dividend 0 0 0 0 Other LT Liabilities 70 152 160 168Net Profit 124 134 91 164 Shareholders Equity 376 472 508 574Net Profit before Except. 124 134 91 164 Minority Interests 0 0 0 0EBITDA 196 242 144 248 Total Cap. & Liab. 874 987 1,023 1,110Sales Gth (%) 133.2 27.9 (13.0) 28.7 Non-Cash Wkg. Capital (69) (16) (2) 9EBITDA Gth (%) 394.8 23.4 (40.5) 72.3 Net Cash/(Debt) (117) (150) (248) (212)Opg Profit Gth (%) 430.4 28.0 (38.9) 70.0Net Profit Gth (%) 335.6 7.3 (31.9) 80.1Effective Tax Rate (%) 31.4 39.0 30.0 30.0Cash Flow Statement (US$ m) Rates & RatioFY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011FPre-Tax Profit 181 219 130 234 Gross Margins (%) 39.4 40.1 30.3 38.6Dep. & Amort. 17 13 22 24 Opg Profit Margin (%) 32.4 32.4 22.8 30.1Tax Paid (57) (85) (39) (70) Net Profit Margin (%) 21.3 17.8 14.0 19.5Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 36.6 31.5 18.5 30.2Chg in Wkg.Cap. (13) (45) 40 (12) ROA (%) 15.5 14.4 9.0 15.3Other Operating CF 63 79 0 0 ROCE (%) 19.4 18.9 11.9 18.5Net Operating CF 192 181 153 176 Div Pa out Ratio % 47.4 60.7 60.0 60.0Ca ital Ex . net 81 150 150 50 Net Interest Cover x 12.8 10.6 10.6 18.0Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.7 0.8 0.6 0.8Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 45.5 38.8 51.4 42.5Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 108.4 86.4 92.7 78.7Other Investing CF 16 (4) 0 0 Inventory Turn (avg days) 5.0 15.3 15.5 5.2Net Investing CF (65) (154) (150) (50) Current Ratio x 1.1 0.5 1.0 1.4Div Paid 59 81 55 98 uick Ratio x 1.0 0.4 0.8 1.3Chg in Gross Debt 73 (111) 44 0 Net Debt/Equity (X) 0.3 0.3 0.5 0.4Capital Issues 0 26 0 0 Net Debt/Equity ex MI (X) 0.3 0.3 0.5 0.4Other Financing CF 1 1 (22) 8 Capex to Debt (%) 28.1 72.7 59.9 20.0Net Financing CF 15 (165) (32) (90) Z-Score X 2.5 2.5 3.3 3.2Net Cashflow 141 139 29 36 N. Cash/ Debt PS US cts. 10.7 13.3 22.0 18.8

Opg CFPS (US cts.) 18.7 20.0 10.0 16.6Free CFPS (US cts.) 10.1 2.7 0.3 11.2Quarterly / Interim Income Statement (US$ m) Segmental Breakdown / Key Assumptions

FY Dec 3Q2009 4Q2009 1Q2010 2Q2010 FY Dec 2008A 2009A 2010F 2011FTurnover 200 233 153 192 Revenues (US$ m)Cost of Goods Sold (128) (152) (123) (145) Coal Mining 571 735 651 839Gross Profit 72 81 30 47 Commodities Trading 0 0 0 0Other Oper. (Exp)/Inc (9) (28) (10) (9) Marine Engineering 14 13 0 0Operating Profit 63 53 20 38 Total 585 748 651 839Other Non O Ex /Inc 0 15 1 3Associates & JV Inc 0 0 0 0Net Interest (Exp)/Inc (5) (5) (4) (3) Gross Profit (US$ m)Exceptional Gain/(Loss) 0 0 0 0 Coal Mining 224 298 197 324Pre-tax Profit 58 63 17 33 Commodities Tradin 0 0 0 0Tax (19) (25) (6) (9) Marine Engineering 7 3 0 0Minorit Interest 0 0 0 0 Total 231 300 197 324Net Profit 39 38 11 23Net profit bef Except. 39 38 11 23EBITDA 63 68 22 35 Gross Profit Margins (%)

Coal Mining 39.2 40.5 30.3 38.6Sales Gth (%) 14.0 16.5 (34.1) 24.8 Commodities Trading N/A N/A N/A N/AEBITDA Gth (%) 25.5 7.0 (68.1) 63.2 Marine Engineering 47.9 20.2 N/A N/AO Profit Gth % 6.1 16.2 61.7 86.2 Total 39.4 40.1 30.3 38.6Net Profit Gth % 80.1 1.4 70.6 107.6Gross Margins (%) 36.1 34.8 19.7 24.3Opg Profit Margins (%) 31.7 22.8 13.3 19.8 Key AssumptionsNet Profit Margins (%) 19.3 16.3 7.3 12.1 Coal Price 71.5 82.1 70.2 73.1

Sales Volume 8.6 9.2 10.0 12.5Cash Cost 40.4 47.5 45.4 41.2

Source: Company, DBS Vickers


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DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)BUY (>15% total return over the next 12 months for small caps, >10% for large caps)HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)FULLY VALUED (negative total return i.e. > -10% over the next 12 months)SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)Share price appreciation + dividends

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not to be construed as recommendations to trade in the physical commodities or in futures contracts relating to the commoditiesmentioned in this report.

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transactionas a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarificationon disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

ANALYST CERTIFICATIONThe research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about thecompanies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part ofhis/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of18 Aug 2010, the analyst and his / her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in thesecurities recommended in this report (interest includes direct or indirect ownership of securities, directorships and trustee positions).

COMPANY-SPECIFIC / REGULATORY DISCLOSURES1. DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the mentioned

company as of 16-Aug-2010

PT. DBS Vickers Securities Indonesia ("DBSVI") have a proprietary position in Bukit Asam recommended in this report asof 18 August 2010.

2. DBS Bank Ltd has been appointed as the designated market maker of structured warrant(s) for Straits Asia Resourcesissued by DBS Bank Ltd.

3. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registeredbroker-dealer, may beneficially own a total of 1% or more of any class of common equity securities of the mentionedcompany as of 18 Aug 2010.

4. Compensation for investment banking services:i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past

12 months, and within the next 3 months receive or intends to seek compensation for investment banking servicesfrom the mentioned company.

ii. DBSVUSA does not have its own investment banking or research department, nor has it participated in anyinvestment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing toobtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction inany security discussed in this document should contact DBSVUSA exclusively.


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Straits Asia Resources 18 Aug 2010

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