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Are Geo Energy's latest acquisitions too good to be true?

Uma Devi
Uma Devi • 4 min read
Are Geo Energy's latest acquisitions too good to be true?
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SINGAPORE (Sept 24): Geo Energy Resources announced Monday it was acquiring PT Titan Global Energy (TGE), and a 51% stake each in two producing mines, PT Bara Anugrah Sejahtera (BAS) and PT Banjarsari Pribumi (BP), for US$25 million ($34 million).

On the surface, market watchers say the acquisitions appear to be promising. But some remain cautious, especially due to the bleak outlook of the coal industry.

On one hand, the deal will give Geo Energy access to mining operations and coal deposits located in South Sumatra – one of the three largest regions of Indonesian coal resources.

In addition, the strategic acquisitions are slated to bring diversification to higher calorific value coal reserves and production.

See: Geo Energy to acquire Titan Global Energy, 2 producing mines in South Sumatra for $34 mil

Analysts agree that the acquisitions could positively impact the group’s operational and financial metrics.

For starters, the mines are of higher calorific value of 4,550 on a gross as received (GAR) basis, compared to the 4,200 GAR of the company’s existing mines.

KGI Securities analyst Joel Ng opines that the new acquisitions are a “bargain”, due to the mines’ positive track record. He notes, for example, that the two mines produced 3.8 million tonnes of coal in 2018 alone.

“The acquisition is highly earnings accretive,” Ng says in a Tuesday report. “Had it been completed on Jan 1, 2018, Geo Energy’s full-year 2018 earnings would have increased from US$18 million to US$72 million, and 1H19 earnings would have reversed from a loss of US$8 million to profits of US$40 million.”

But, on the flipside, Ng advises caution on both the uncertainties surrounding the acquisition conditions as well as the industry at large.

For now, Ng says it is still too early to celebrate as there are certain conditions that have yet to be met. These include the completion of due diligence, the receipt of necessary consent from the respective creditors of the target mines, and meeting the Joint Reserves Committee’s minimum reserve regulation of at least 60 million tonnes and not less than 4,550 GAR.

In addition, Ng points out that Geo Energy has some cause for concern in terms of bond yields.

The company’s US$300 million bond back in 2017 is currently trading at 19.8% in terms of yield to maturity. According to Ng, this reflects investors’ concerns of the challenging industry landscape and the need for the group to increase its coal reserves through an acquisition.

“[Geo Energy] will need to make an acquisition within the next two years if it is to avoid redeeming its bonds in April 2021, which would then subject the group to refinancing issues if coal prices were to remain low,” Ng shares.

To top it all off, Geo Energy’s future is likely to be impacted by the weak industry outlook, which could be worsened by sluggish economic growth.

In particular, China seems to be a key determinant for the group, as exports to China accounted for 80% of its FY18 revenue.

China also accounts for about 20% of global market share in terms of coal imports, and this could be adversely affected amid the slowdown in the country’s growth on the back of ongoing US-China trade tensions.

“Chinese policies and the macro-economic environment once again drove market sentiments and caused coal prices to weaken in 1H19, and we expect a similar level of volatility in 2020 amid weaker global economic growth,” says Ng.

As such, despite the company’s recent strategic acquisitions, KGI is maintaining its “neutral” call on Geo Energy.

The brokerage is also slashing its target price by 33% to 14 cents, on the back of the headwinds that the coal industry is still grappling with.

As at 3.22pm, shares in Geo Energy are trading flat at 14.8 cents, or at a price-to-earnings (PE) of 103.6 times and a dividend yield of 3.3%, according to KGI valuations.

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