Geo Energy growth comes with significant downside risks

Geo Energy Resources (GER) is an Indonesian coal miner operating the PT Bumi Enggang Khatulistiwa (BEK) coalmine in East Kalimantan. GER plans to expand coal production from an annual average of 0.6mn tonne during 2009-2011, to an annual average of 2.4mn tonne during 2012-2017. In addition, supported by rise in forecast coal prices, we estimate GER to report 27% EPS CAGR over 2011-14f. However, the earnings growth comes with significant downside risks. We value GER at 25% discount to its peers and initiate coverage with SELL rating. Our TP of S$0.34 is 18% below the current price level.

Strong earnings growth profile: We expect GER to deliver 27% EPS CAGR during 2011-2014f, driven by: 1) growth in coal production from 0.7mn tonne in 2012f to 2.5mn tonne in 2014f;

2) increase in average sales price from US$46.8/tonne in 2012f to US$49.4/tonne in 2014f; and 3) 275bps expansion in net margin between 2011-2014f driven by strong cost control.

But growth entails significant downside risks: The coal mining business will account for 67%-75% of the gross profit during 2012f-2014f and we see the following downside risks to this business:


1) BEK-the only coal mining asset: any disruption in coal production at BEK will significantly lower earnings;

2) likely export prohibition: GER could be subject to coal export prohibition as almost all coal produced at BEK could be classified as ‘low rank coal’;

3) exposed to coal price volatility: GER has not signed any fixed price coal sales contract beyond 2012, leaving future coal sales exposed to coal price volatility.

Initiate coverage with SELL rating and TP of S$0.34: Adjusted for 41% EBITDA growth in 2013f, GER currently trades at 5.8x 2013f EV/EBITDA, which is in-line with most of its Indonesian peers. We value GER at 4.6x 2013f EV/EBITDA (25% discount to its peers). The valuation discount is supported by: 1) single mine operation risk with a low reserve/resource base, and 2) low calorific value of coal, which entails the risk of exports being prohibited.