SINGAPORE (Mar 16): Recent changes to regulations for Indonesia's coal sector is expected to have limited impact on Golden Energy and Resources (GEAR), according to Phillip Capital.
Recently, Indonesia's Minister of Energy and Mineral Resources announced several changes pertaining to Domestic Market Obligation (DMO) for the country's coal sector.
Among the revisions, coal miners like GEAR are required to supply at least 25% of total production in FY18 to the domestic market.
In the public interest, coal sale price for the power sector is fixed at US$70/tonne ($92/tonne) if the prevailing price is higher than that.
In a Friday report, analyst Chen Guangzhi expects the amended regulations to have limited impact on GEAR since it has been supplying 58% and 30% of annual production domestically in FY16 and FY17.
In addition, the fixed price will be mainly applied to the portion that is supplied to PLN, the Indonesian government-owned power corporation.
"We think the coal price outlook for GEAR remains stable with our assumption of US$43/tonne in FY18," says Chen who still expects production growth to drive performance.
Moreover, the group has issued US$150 million of senior notes. After repaying US$50 million of facilities, GEAR has cash in hand amounting to US$290 million currently.
At the start of FY18, GEAR signed 13 offtake agreements with clients that included domestic power plants and trading houses. Nine of the contracts locked in 11.3 million tonnes of coal sales for export while the remaining four are domestic supply contracts which lock in another 3.8 million tonnes.
"To sum up, GEAR had secured 15.1 million tonnes of sales in FY18, which amounted to 75% of the annual target of 20 million tonnes," says Chen.
"We believe it will acquire more assets or investments to enhance the yield by leveraging the war chest in the near term," adds the analyst.
To recap, 4Q17 revenue beat Phillip's forecast by 23.5% due to higher than expected sales volume and average selling price (ASP). However, net profit missed by 6% due to higher cash cost and income tax expenses. FY17 production volume rose 64.2% y-o-y to 15.6 million tonnes. ASP grew a healthy 25.7% y-o-y.
Chen says GEAR's FY17 stunning performance was mainly due to the ramp-up of production, especially in 4Q17 when production peaked. This substantially helped the group to overshoot the full-year production target of 14.4 million tonnes. Meanwhile, ASP recorded healthy y-o-y growth of 25.7%, driven by the persistent shortage of thermal coal supply in China.
Phillip is maintaining its "buy" call on GEAR with a lower target price of 48 cents.
As at 4.21pm, shares in GEAR are up 1 cent at 38 cents or 8.4 times FY18 earnings.