Sakari better than expected ASP in 2Q12

Fair value S$1.45


Decent QoQ improvement in 2Q12
Sakari Resources Limited (SRL) saw 2Q12 revenue rebounding 5.4% YoY and 26.1% QoQ to US$238.0m, boosted by higher production and steady ASPs of its thermal coal. While net profit fell 38.5% YoY to US$23.9m, it also represented a 65.6% QoQ improvement. For 1H12, revenue fell 8% to US$426.8m, meeting 48.7% of our FY12 forecast, while net profit declined 57% to US$38.4m, or 63.5% of our full-year estimate. SRL retained its 60% payout ratio by declaring an interim dividend of US$0.02/share, versus US$0.0424 a year ago.

Operational ramp-up as previously guided
Coal production at Jembayan was up 42.6% QoQ after SRL brought forward the opening of two new pits. Aided by lower fuel cost, cash cost in Jembayan improved 14.7% QoQ to US$57.60/ton. But SRL does not expect any significant reduction from current cost levels in 2H12. Sebuku production also increased by 29.5%, but cash cost was stable at
US$42.70/t due to higher costs associated with mud handled negating savings from improved economies of scale.

Keeps US$85-90/t ASP guidance
After achieving an ASP of US$94.50/t (versus US$94.8/t in 1Q12), SRL is maintaining its US$85-90/t guidance for 2012, despite weak international coal prices. This is because SRL has concluded pricing on ~80% of its target 2012 production at an average of US$90/t. Meanwhile, it has reduced its capex guidance to US$80-100m, down from the previous US$150m, given the still muted global economic outlook.

HOLD with S$1.45 fair value
While we are bumping up our FY12 earnings by 42% due to higher margin assumptions, we are paring our FY13 earnings by 18% on a more muted outlook for coal prices. Current prices are ~US$83/ton, or 8% below SRL’s average contracted price. Hence, a prolonged slump in coal prices could affect performance in 2013 since production and prices are still unfixed. With the current undemanding valuation, we maintain our HOLD rating and S$1.45 fair value.