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Broker's Digest: Golden Energy and Resources, Genting Singapore, First Resources, Megachem, ARA US Hospitality Trust

The Edge Singapore
The Edge Singapore • 10 min read
Broker's Digest: Golden Energy and Resources, Genting Singapore, First Resources, Megachem, ARA US Hospitality Trust
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Golden Energy and Resources
Price target:
KGI “outperform” 64 cents

Coal demand still up despite sustainability push

KGI Securities is initiating coverage of Golden Energy and Resources (Gear), the “fastest-growing coal producer in Asia”.

In an Aug 25 note, KGI Securities analysts Chen Guangzhi and Joel Ng are starting the company on “outperform” with a target price of 64 cents, which represents an upside of 137%.

Gear is a diversified mining and natural resources investment company, write Chen and Ng. Having its roots as one of Indonesia’s largest coal miners, the group has since branched out into precious metals over the past four years.

Gear will further diversify into base metals that will be utilised for clean energy uses such as copper, cobalt, zinc and nickel, they add.

“While other coal miners have plateaued or are reporting only single digit production growth, Gear is expected to increase production by 30% over the next three years,” write Chen and Ng.

Gear, through its 50% owned Ravenswood Gold gold mine, is estimated to produce around 200 kilo ounces of gold per annum by 2022. Its ASX-listed company Stanmore Resources will ramp up production to 2.4 million tonnes per annum of metallurgical coal in 2H2021, they add.

Chen and Ng see double-digit production growth over the next three years for the company. “We estimate Gear’s Indonesian thermal coal output to increase from 33.5 million tonnes in 2020 to 36 million tonnes in 2021, and surging another 30% to 47 million tonnes by 2024.”

That is not all. This is amid favourable coal prices that are providing a windfall for current coal producers, say Chen and Ng. “All this points to a bright outlook for Gear in the next couple of years.”

Gear benefits from mines that have a long life of between 10 to 15 years, which is an advantage as it provides visibility and gives longterm clients the confidence to enter into supply contracts with the group, they add.

“Gear also has one of the largest reserves in Indonesia of more than 1 billion tonnes of thermal coal. With one of the lowest stripping ratios of around 4.0 for large-scale coal operators, Gear is able to withstand the cyclical impact of volatile coal prices,” say Chen and Ng.

In addition, coal demand is projected to decline in North America and Europe, but rise in Asia. “Coal is expected to remain a major part of China’s electricity generation beyond 2030, alongside growing capacity for renewables. In 2020, coal still dominated China’s energy mix at 59% of market share, and Platts Analytics expects the country’s coal-fired power generation to only peak by 2027,” say Chen and Ng. Therefore, coal demand in the world’s largest coal consuming country will continue to grow from 2021 to at least until 2025.

But what about the push towards renewable energy? “Whether we like it or not, coal powered plants are still growing,” say Chen and Ng. “Despite all the negative media coverage over coal use, there are still 354 coalfired power plants under construction as of July 2021, and more than 600 plants have been announced or pre-permitted. We cannot deny the fact that coal is still the cheapest source of energy supply in the world, and this points to growing demand in Asia over the next decade.” — Jovi Ho

Genting Singapore
Price target:
CGS-CIMB “add” 95 cents

Staying optimistic despite Yokohama IR setback

CGS-CIMB Research analyst Tay Wee Kuang has kept “add” on Genting Singapore with the same target price of 95 cents as its plans to build an integrated resort (IR) in Yokohama, Japan, fall through.

The current target price is pegged at 9.5 times of FY2022 EV/Ebitda.

Following his win in the Yokohama mayoral elections, Dr Takeharu Yamanaka, who campaigned on an anti-IR platform, announced that the city will not be making a hosting bid as one of Japan’s IR destinations.

This, says Tay in an Aug 23 report, could prompt “unfavourable share price movement” due to a lack of catalysts in the near-term.

Currently, Genting Singapore is banking on the reopening of international borders for its recovery. In the 1HFY2021 ended June, the group reported adjusted ebitda of $276 million, with the lack of tourists hurting non-gaming revenue.

“Travel arrangements with China and the Asean countries, whose travellers combined account for up to 80% of Genting Singapore’s visitor demography, will be key to its recovery,” he writes.

That said, Tay has kept his estimates unchanged as the potential earnings accretion from the Yokohama IR project was not factored into his current target price.

Genting Singapore is also relying on RWS 2.0 — where it has committed to a $4.5 billion project with the Singapore government in exchange for extending the exclusivity period on its casino license to end-2030 — to drive longer-term growth.

To this end, Tay says he remains optimistic that leisure travel may return in the FY2022, according to the initial border reopening plans laid out by the government.

“[The plans], which include dedicated vaccinated travel lanes, could be increasingly beneficial to Genting SIngapore as vaccination rates in regional neighbours improve,” he writes. — Felicia Tan

First Resources
Price target:
UOB Kay Hian “hold” $1.40
Maybank Kim Eng “buy” $1.81
RHB “buy” $1.50

Look to 2HFY2021 for better results

Analysts have had mixed reactions to First Resources’ announcement of its 1HFY2021 ended June results on Aug 13 which saw earnings of US$32.6 million ($44.3 million), which was below consensus estimates.

UOB Kay Hian has downgraded its rating to “hold” with a lower target price of $1.40 from $1.50 previously. Maybank Kim Eng has kept its “buy” call but with a lower target price of $1.81, down from $1.88 previously.

Meanwhile, RHB kept its “buy” rating and target price of $1.50 unchanged.

All three brokerages noted that First Resources’ lower earnings was mainly driven by lower average selling price (ASP) arising from earlier committed sales that were priced before factoring the higher levy that took effect in December 2020.

Nonetheless, analysts expect a much stronger 2HFY2021 performance from the company, driven by higher ASP reflective of current higher crude palm oil (CPO) prices as well as favourable revision in the export tax structure that came into effect on July 2.

UOB Kay Hian and Maybank Kim Eng also point out that First Resources has an inventory build-up of some 20,000 tonnes as at June due to some delayed shipments and deliveries, which may translate to higher sales in 2HFY2021.

UOB Kay Hian analysts Jacquelyn Yow Hui Li and Leow Huey Chen highlight that First Resources’ 1HFY2021 earnings accounted for only around 15% of their full-year estimate, coming in below expectations.

While the analysts expect First Resources’ strong downstream performance to carry into the 2HFY2021, they point out that the company’s fertiliser application was behind schedule in the first half of the year, accounting for less than 50% of its full-year target due to the high rainfall at the start of the year.

To that end, Yow and Leow have tweaked their earnings estimates for FY2021 and FY2022 down by 14.3% and 4.5% respectively to account for higher fertiliser cost, though this will be partially offset by better downstream margins.

Maybank Kim Eng analyst Ong Chee Ting considers the “slow start” for First Resources’ earnings within his expectations. He maintains his “buy” call for the company in view of the better performance expected for the second half of the year driven by higher output and CPO prices. “Following our industry-wide CPO price upgrade, we have raised our FY2021–2023 EPS by 6%/4%/4% respectively,” he remarks.

His has rolled forward his valuations to FY2022. His revised target price of $1.81 is based on 14 times P/E which is pegged at one standard deviation below its five-year mean to reflect slowing growth prospects.

RHB’s Singapore research team believes investors should look past First Resources 1HFY2021 to the better performance in the second half. “We make no changes to our forecasts. We believe 2H2021 will be the much stronger half given the prevailing higher prices,” the team remarks. — Atiqah Mokhtar

Price target: SAC Capital “buy” 55 cents

Record 1HFY2021 earnings

SAC Capital analyst Lam Wang Kwan has kept his “buy” call on Megachem with a higher target price of 55 cents from 50 cents previously on the back of its record results for the 1HFY2021 ended June.

For the half-year period, Megachem’s earnings grew by 39.7% y-o-y to $3.8 million, while revenue increased 26.7% y-o-y to $65.9 million. Both figures stood above Lam’s estimates for the FY2021.

His new target price translates into FY2021 P/E of 11.4 times and P/B of 1.3 times.

Lam has also upped his topline estimates for the FY2021 by 13.5% and bottom line estimates by 56.1% to factor in more customer wins and improved net margins from operating leverage.

In addition, he has increased his topline and bottomline estimates for FY2022 by 12.5% and 41.9% respectively.

In his report dated Aug 23, Lam has identified four tailwinds that the company is well-positioned to benefit from.

The factors, he adds, are sustainable into the 2HFY2021 as well.

First, an uncertainty in demand has resulted in customers opting for smaller and more frequent purchases from distributors like itself, instead of buying in larger quantities directly from chemical producers.

Second, the supply chain bottleneck also led to customers turning to sources that are nearer their manufacturing bases.

Third, Megachem also benefitted from the surge in demand for specialty chemicals used in cleaning and distribution, technology and healthcare sectors.

Finally, firmer oil and commodities prices that lead to the increase in prices of specialty chemicals are also passed on to the customers.

These trends, he says, are likely to remain even after the Covid-19 pandemic.

Megachem is also well-positioned to ride on the capacity build-up of Malaysian glove manufacturers. It is also deemed to benefit from the capacity expansion of the semiconductor sector in Penang.

To this end, the company is building a new warehouse in Malaysia to position for the expected uptick in demand. — Felicia Tan

ARA US Hospitality Trust
Price target:
DBS Group Research “buy” 75 US cents

More meaningful recovery seen for FY2022

DBS Group Research analyst Geraldine Wong has maintained “buy” on ARA US Hospitality Trust (ARAHT) as she deems the REIT’s recovery to be “on track”.

“We expect a sustained recovery for ARAHT on the back of a summer leisure demand spillover into 2HFY2021 and the return of corporate travel,” she writes in an Aug 20 report.

That said, Wong has reduced her target price estimate to 75 US cents ($1.02) from 79 US cents previously, as she reduces her earnings estimates slightly.

“We were too optimistic previously,” she explains.

The new target price implies a 48% upside and an “attractive” FY2022 yield of 9.5%.

Wong, however, remains optimistic on the REIT’s prospects as she still sees a doubling of cash flows in 2HFY2021 ending December and a further recovery in FY2022.

“We [still] see scope for occupancy and rates to move further upwards towards normalised levels,” she says.

“Operational data sector-wide also seems to support this steady recovery to normalcy,” she adds.

To Wong, ARAHT is well-positioned in the select-service and extended-stay segments, which are favoured over the full-service segment, given the more labour-efficient operating model.

“We thus see profits and distributions rebound quicker than the other segments on the back of a lower cost front and consumer preferences, benefitting ARAHT,” she writes.

On the back of a return in travel demand, an improvement in cash flows in the second-half of FY2021 will support higher portfolio valuations.

The catchup in valuations and lower gearing will be positive catalysts for the counter.

“Valuers have opined that the fair value for ARAHT portfolio should be US$888 million upon normalisation in 2024 (vs US$687 million as at end December 2020), bringing the gearing level down to 40% in the medium term,” says Wong.— Felicia Tan

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