Sakari Q3 net profit of US$37 mn

Goldman Sachs - TP S$1.70

What surprised us
3Q11 net profit of US$37mn declined 5% qoq and 9M11 net profit of US$117mn was 80% of our prior 2011 forecasts, 72% of Bloomberg consensus. We expect 4Q net profit to decline further qoq on lower ASPs as spot Newcastle coal prices have been declining recently (in line with our expectations) while about 40% of SAR’s annual contracts are index linked. The company reduced the 2012 volume guidance for Jembayan mine from 11MT to 10 MT i.e. flat vs.
2011 target as:
(1) mine size has become too big and this warrants a re-look at mine operations and
(2) softening thermal coal demand. Cash production costs remain high at US$58/t in 3Q due to higher strip ratio in the Jembayan mine (partly offset by lower costs at Sebuku mine). Production volumes in 9M11 were in-line with our expectations and constituted 72% of our 2011 forecasts.
Production from Northern Leases started in Sep 2011 (as guided) ,already part of our forecasts. Meanwhile ASPs in 3Q11 held up better than our expectation at US$94/t in 3Q11. SAR also announced a reserve upgrade of 23% for the Jembayan mine driven by ongoing drilling.

What to do with the stock
Despite a reserves upgrade, the market may react negatively on weak results and lower 2012 volume guidance. We revise our 2011E/12E/13E forecasts by +2%/-5%/-3% to factor in higher-than-expected ASP in 3Q11 and lower volumes for 2012E/13E. On the back of our EPS changes, we trim our Director’s Cut based 12-m TP to S$1.70 (prior $1.75) and we maintain our Sell rating. Key risks: higher-than-expected coal prices, higher production volumes.


Nomura - Price target: 2.75 SGD

Strong coal prices continued to help Straits Asia as it delivered Q3 net profit of US$37 mn (in line with our estimates). 9M now forms 74% of our full-year nos. On the positive side, Northern Leases started production and reserve upgrade came in for Jembayan. On the other hand, the outlook was soft, as not seeing aggressive demand from end markets. In case of any coal price correction, volume pick up would be necessary for Sakari meet our (and Street’s) FY estimates. We remain Neutral as we do not see any upside risks and think the stock could remain volatile in the current macro environment.

EARNINGS INLINE WITH OUR ESTIMATES
3Q11 earnings were in line our estimates (and consensus), with 9M11 net profit of US$117mn constituting 74% of our FY11F estimates

WHAT DOES THE RESULT MEAN?
1. Realized ASP of coal prices held up at the higher level of US$ 94.4/mT close to 2Q11 (up ~41% y-y and almost flat q-q), whereas sales volumes declined 9% y-y. Nonetheless, higher ASP led to 3Q11 revenue growth of ~21%y-y and flat q-q.
2. However, overall cost per tonne for 3Q11 declined ~3% q-q on the back of lower strip ratio of 3.76 in 3Q11 vs 7.48 in 2Q11 at Sebuku
3. On the volumes front, 9M11 sales volume at ~69% of our full-year estimate but the gap may be closed during 4Q11, in our view. Even if coal prices soften a bit during 4Q11, an offsetting increase in volumes should help Sakari meet our full-year estimates.

LIKELY STOCK REACTION
We don't see any substantial movement in stock price.

KEY NUMBERS AND OTHER TAKEAWAYS
1. After much delay, Sakari commenced production from Northern Leases at Sebuku mine during the quarter. With this, the management has guided output from Sebuku for FY11 ~ 1.6mn mT (our estimate is 1.2mn mT).
2. Latest drilling at Jembayan has led to Coal reserves being revised upwards by 23% as compared to Dec-2010 after adjusting for production. The latest reserves stand at 142.3mn mT.
3. Coal production for 3Q11 remained strong at 2.78mn mT, an increase of 2% y-y but sales volume fell y-y.
4. According to management, ASP for FY11 would be close to US$90/mT (our estimate is US$ 84/MT) while the overall production volumes would meet earlier set targets.
5. In view of not-so-aggressive demand coming for additional tonnage of coal shipments, the management is adopting a wait-and-watch approach for next few months to ramp up production capacity at Jembayan.
6. The company has given FY12 production guidance of 10mn mT at Jemabayan and ~2.5mn mT at Sebuku (our estimate is 10mn MT at Jembayan and 2.5mn MT Sebuku).