Singapore Company Focus

Straits Asia Resources

Bloomberg: SAR SP | Reuters: STRL.SI

DBS Group Research . Equity 18 Aug 2010

Upside priced in
HOLD S$2.04 STI : 2,923.36 • No change to FY10/11 earnings estimates
Price Target : 12-Month S$ 2.20 (Prev S$ 2.04) • Possible upside from mine license award, but this
Reason for Report : Company Update could be largely priced in
Potential Catalyst: Stronger than expected coal price momentum in 2H
• Jembayan reserve upgrade may not be significant
Analyst
Suvro Sarkar +65 6398 7973 • Maintain HOLD, DCF-based TP revised up to S$2.20
suvro@dbsvickers.com
2Q10 net profit of US$23m slightly ahead of our
expectations of US$15-20m, as SAR posted higher-than-
expected sales of 2.6m tons of coal from Jembayan mine, driven
by higher production of 2.5m tons and inventory drawdown of
Price Relative
S$
about 0.3m tons. Management continues to guide for 8 - 8.5m
R e la t iv e In d e x

4 .5 0
tons annual production at Jembayan in 2010. Sebuku production
619
4 .0 0
519
continued to be low at 0.2m tons, though we expect sequential
3 .5 0
3 .0 0 419 improvement in production in 2H10. While gross ASP of
2 .5 0
2 .0 0
319
US$72/ton was within expectations, slightly boosted by higher
prevalent spot prices in 2Q, cash costs at both mines continued to
219
1 .5 0
119
1 .0 0
0 .5 0 19 be high (Sebuku: US$52/ton, Jembayan: US$47/ton).
Sebuku Northern Leases – finally but when? That is the
2006 2007 2008 2009

question uppermost in investors’ minds and recent updates from

S t r a it s A s ia R e s o u r c e s (L H S ) R e la t iv e S T I IN D E X ( R H S )

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

Forecasts and Valuation likely by end-3Q. Adding 3 months for the final permits and a
couple of months before mining starts, we are looking at
FY Dec (US$ m) 2008A 2009A 2010F 2011F
contribution from mid-1H11. The Sebuku “supercharger” partly
Turnover 585 748 651 839
EBITDA 196 242 144 248 drives our 80% EPS growth projection for FY11, and hence, any
Pre-tax Profit 181 219 130 234 further delays could lead to downward revision in FY11 numbers.
Net Profit 124 134 91 164 Valuations not compelling yet. While we revise up our DCF-
Net Pft (Pre Ex.) 124 134 91 164
EPS (S cts) 15.4 16.0 10.9 19.6
based TP to S$2.20 (WACC lowered to 12% in line with lower risk
EPS Pre Ex. (S cts) 15.4 16.0 10.9 19.6 free rate assumptions for Indonesia), we maintain our HOLD call
EPS Gth Pre Ex (%) 335 4 (32) 80 on the stock as we think the market has largely priced in the
Diluted EPS (S cts) 15.4 16.0 10.9 19.6 Sebuku mine license award and SAR's current FY11 PE of 10.4x is
Net DPS (S cts) 7.3 9.7 6.5 11.8
BV Per Share (S cts) 46.5 56.6 61.0 68.8 not cheap compared to peers. While we do not rule out share
PE (X) 13.2 12.7 18.6 10.3 price upside when the mine license is awarded, a sharp jump
PE Pre Ex. (X) 13.2 12.7 18.6 10.3 could also provide an opportunity to take profit. The Jembayan
P/Cash Flow (X) 13.2 12.7 18.6 10.3
EV/EBITDA (X) 9.0 7.6 13.5 7.7
reserves upgrade, to be announced shortly, is unlikely to be a key
Net Div Yield (%) 3.6 4.8 3.2 5.8 catalyst, as we do not expect a big jump in reserves, given that the
P/Book Value (X) 4.4 3.6 3.3 2.9 coal price assumptions will be revised down from the aggressive
Net Debt/Equity (X) 0.3 0.3 0.5 0.4 US$100/ ton level previously used.
ROAE (%) 36.6 31.5 18.5 30.2

Earnings Rev (%): 0.6 0.0 At A Glance

Consensus EPS (S cts): 14.2 24.7 Issued Capital (m shrs) 1,129
Mkt. Cap (S$m/US$m) 2,290 / 1,691
ICB Industry : Basic Materials Major Shareholders
ICB Sector: Mining PTT Asia Paciifc Mining (%) 45.6
Principal Business: Coal mining company with interests in Indonesia Bank of New York (%) 6.0
legg mason Inc (%) 4.9
Source of all data: Company, DBS Vickers, Bloomberg Free Float (%) 43.5
Avg. Daily Vol.(‘000) 5,156

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: JS / sa: YM
 Company Focus
Straits Asia Resources

Straits Asia Resources – 2Q10 results summary and comparisons

FYE Dec (US$ mill) 2Q09 1Q10 2Q10 Chg yoy Chg qoq
Revenues 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%

Operational
Coal 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: Company

Peers Comparison Table

Mkt Cap Price Opg
Company (US$b) (Local $) PER (x) P/B P/S EV/EBITDA ROE Margin
2009F 2010F
Indonesia peers
Batubara 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 peers
Yanzhou 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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 Company Focus
Straits Asia Resources

Income Statement (US$ m) Balance Sheet (US$ m)

FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F
Turnover 585 748 651 839 Net Fixed Assets 564 702 835 865
Cost of Goods Sold (354) (448) (454) (515) Invts in Associates & JVs 0 0 0 0
Gross Profit 231 300 197 324 Other LT Assets 67 88 83 79
Other Opng (Exp)/Inc (41) (58) (49) (71) Cash & ST Invts 171 57 3 38
Operating Profit 190 243 148 252 Inventory 6 32 7 8
Other Non Opg (Exp)/Inc 6 (1) (5) (5) Debtors 61 98 85 110
Associates & JV Inc 0 0 0 0 Other Current Assets 5 10 10 10
Net Interest (Exp)/Inc (15) (23) (14) (14) Total Assets 874 987 1,023 1,110
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 181 219 130 234 ST Debt 89 207 1 1
Tax (57) (85) (39) (70) Other Current Liab 141 156 104 118
Minority Interest 0 0 0 0 LT Debt 199 0 250 250
Preference Dividend 0 0 0 0 Other LT Liabilities 70 152 160 168
Net Profit 124 134 91 164 Shareholder’s Equity 376 472 508 574
Net Profit before Except. 124 134 91 164 Minority Interests 0 0 0 0
EBITDA 196 242 144 248 Total Cap. & Liab. 874 987 1,023 1,110

Sales Gth (%) 133.2 27.9 (13.0) 28.7 Non-Cash Wkg. Capital (69) (16) (2) 9
EBITDA 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) 70.0
Net Profit Gth (%) 335.6 7.3 (31.9) 80.1
Effective Tax Rate (%) 31.4 39.0 30.0 30.0
Cash Flow Statement (US$ m) Rates & Ratio
FY Dec 2008A 2009A 2010F 2011F FY Dec 2008A 2009A 2010F 2011F
Pre-Tax Profit 181 219 130 234 Gross Margins (%) 39.4 40.1 30.3 38.6
Dep. & Amort. 17 13 22 24 Opg Profit Margin (%) 32.4 32.4 22.8 30.1
Tax Paid (57) (85) (39) (70) Net Profit Margin (%) 21.3 17.8 14.0 19.5
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 36.6 31.5 18.5 30.2
Chg in Wkg.Cap. (13) (45) 40 (12) ROA (%) 15.5 14.4 9.0 15.3
Other Operating CF 63 79 0 0 ROCE (%) 19.4 18.9 11.9 18.5
Net Operating CF 192 181 153 176 Div Payout Ratio (%) 47.4 60.7 60.0 60.0
Capital Exp.(net) (81) (150) (150) (50) Net Interest Cover (x) 12.8 10.6 10.6 18.0
Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.7 0.8 0.6 0.8
Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 45.5 38.8 51.4 42.5
Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 108.4 86.4 92.7 78.7
Other Investing CF 16 (4) 0 0 Inventory Turn (avg days) 5.0 15.3 15.5 5.2
Net Investing CF (65) (154) (150) (50) Current Ratio (x) 1.1 0.5 1.0 1.4
Div Paid (59) (81) (55) (98) Quick Ratio (x) 1.0 0.4 0.8 1.3
Chg in Gross Debt 73 (111) 44 0 Net Debt/Equity (X) 0.3 0.3 0.5 0.4
Capital Issues 0 26 0 0 Net Debt/Equity ex MI (X) 0.3 0.3 0.5 0.4
Other Financing CF 1 1 (22) 8 Capex to Debt (%) 28.1 72.7 59.9 20.0
Net Financing CF 15 (165) (32) (90) Z-Score (X) 2.5 2.5 3.3 3.2
Net 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 16.6
Free CFPS (US cts.) 10.1 2.7 0.3 11.2
Quarterly / Interim Income Statement (US$ m) Segmental Breakdown / Key Assumptions
FY Dec 3Q2009 4Q2009 1Q2010 2Q2010 FY Dec 2008A 2009A 2010F 2011F
Turnover 200 233 153 192 Revenues (US$ m)
Cost of Goods Sold (128) (152) (123) (145) Coal Mining 571 735 651 839
Gross Profit 72 81 30 47 Commodities Trading 0 0 0 0
Other Oper. (Exp)/Inc (9) (28) (10) (9) Marine Engineering 14 13 0 0
Operating Profit 63 53 20 38 Total 585 748 651 839
Other Non Opg (Exp)/Inc 0 15 1 (3)
Associates & JV Inc 0 0 0 0
Net Interest (Exp)/Inc (5) (5) (4) (3) Gross Profit (US$ m)
Exceptional Gain/(Loss) 0 0 0 0 Coal Mining 224 298 197 324
Pre-tax Profit 58 63 17 33 Commodities Trading 0 0 0 0
Tax (19) (25) (6) (9) Marine Engineering 7 3 0 0
Minority Interest 0 0 0 0 Total 231 300 197 324
Net Profit 39 38 11 23
Net profit bef Except. 39 38 11 23
EBITDA 63 68 22 35 Gross Profit Margins (%)
Coal Mining 39.2 40.5 30.3 38.6
Sales Gth (%) 14.0 16.5 (34.1) 24.8 Commodities Trading N/A N/A N/A N/A
EBITDA Gth (%) 25.5 7.0 (68.1) 63.2 Marine Engineering 47.9 20.2 N/A N/A
Opg Profit Gth (%) (6.1) (16.2) (61.7) 86.2 Total 39.4 40.1 30.3 38.6
Net Profit Gth (%) 80.1 (1.4) (70.6) 107.6
Gross Margins (%) 36.1 34.8 19.7 24.3
Opg Profit Margins (%) 31.7 22.8 13.3 19.8 Key Assumptions
Net 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 12.5
Cash Cost 40.4 47.5 45.4 41.2

Source: Company, DBS Vickers

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 Company Focus
Straits Asia Resources

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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COMPANY-SPECIFIC / REGULATORY DISCLOSURES

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PT. DBS Vickers Securities Indonesia ("DBSVI") have a proprietary position in Bukit Asam recommended in this report as
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 Company Focus
Straits Asia Resources

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