Straits Asia Resources SGX:SAR

Shayne Heffernan has affirmed a strong buy on Straits Asia Resources SGX:SAR with a price target of $5 in 2012.

SAR is poised for earnings growth in 2011, driven by higher thermal coal prices and production volumes. It is expected that SAR will receive the final Pinjam Pakai permit by 2Q 2011, paving the way for its expansion in Sebuku.

Straits Asia is an unique company with a simple business model – mining thermal coal for export to major power utilities in Asia.

Straits Asia Resources (SAR) reported its FY10 results with earnings of US$88.2m, beating both ours and consensus’ estimates.

This represented a 33.9% decline owing to lower thermal coal prices. For its 4Q10, revenue declined by 11.1% YoY to US$207.3m while net profit contracted by 19.7% YoY to US$30.5m.

Nevertheless, these figures represented a strong sequential improvement with revenue and net profit growth of 12.5% and 31.5%, respectively. Abating rainfall at Sebuku enabled SAR to ramp up production in 4Q10, thereby improving unit production costs.

Straits Asia Resources (SAR) reported its 2010 results with earnings of US$88.2m, beating forecast and consensus’ US$82.9m estimate. This represented a 33.9% decline in net profit, mainly on account of lower thermal coal prices, which fell 11% to US$72.81/ton.

Revenue eased by 1.6% to US$736.5m for 2010. For its 4Q 2010, revenue declined by 11.1% YoY to US$207.3m while net profit contracted by 19.7% YoY to US$30.5m.

These figures represented a strong sequential improvement with revenue and net profit growth of 12.5% and 31.5%, respectively. A final dividend of 2.85 US cents has been declared in line with the group’s 60% payout policy, implying total dividends of 4.68 US cents for the year, or a yield of 2.5%.

Production ramp-up at Sebuku lowers unit costs. SAR’s better-than-expected performance arose from higher output at both mines, with Sebuku producing 1.1Mt (vs. OIR’s 1Mt estimate) and Jembayan producing 9.4Mt (vs. OIR’s 9Mt estimate).

Production at Sebuku ramped up towards the end of the year as heavy rains abated, allowing the group to improve its unit cost of production on the back of lower strip ratios.

Poised for earnings growth in 2011.

SAR has successfully navigated through what we view was a challenging 2010 with multiple hardships ranging from falling thermal coal prices to higher production costs.

HCM believe that the worst is over, as evidenced in the group’s sequential improvement in performance over the past two quarters. While high production costs will persist owing to Indonesia’s inflation and climbing fuel costs, these should be offset by an increase in thermal coal prices coupled with higher production volumes.

SAR was recently awarded the Principle License for the Northern Leases at Sebuku.

In November 2006, Straits Asia was the first coal company to be listed in Singapore and remains in that unique status.

We own 2 producing mines, both in Indonesia: Sebuku mine on Sebuku Island in South East Kalimantan, and Jembayan mine near Samarinda in East Kalimantan.

Our small head office in Singapore oversees marketing, accounting and other group corporate activities. We have a technical and administrative support office for our mines in Balikpapan and an Indonesian head office in Jakarta that handles, central government relations, tax and legal matters.

Straits Asia Group has a culture that demands us to maintain international standards and professionalism at all levels of business. We fully recognize our obligations to local communities where we mine and to the environment, demonstrated by awards we have received from country Presidents for bringing work and benefits to communities and for environmental rehabilitation.

Straits Asia Resources Limited (“Straits Asia”, SGX: SAR) is announced today that the Minister of Forestry has issued the Principle Licence (Izin Prinsip)
for the Northern Leases at Sebuku.

The Izin Prinsip is the precursor to the Izin Pinjam Pakai (Borrow and Use Licence) and its main purpose is to confirm rights to conduct extraction of coal provided certain final conditions are met. The Izin Prinsip sets out the conditions and, once they are fulfilled, mining and exploration may commence in the permitted area.

The Northern Leases are a key part of Straits Asia’s long-term strategy for mining its concessions at Sebuku. The area lies immediately to the North of the mine’s Tanah Putih pit and the same coal seams are continuous into the Northern Leases.

Straits Asia already holds a general body of information about the coal and geology in the Northern Leases and expects to commence work in the Northern Leases relatively quickly after the Borrow and Use Licence is issued, which will lead to the long-awaited ramp up of production from Sebuku mine.