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Geo Energy Resources Ltd (GEO) 1Q18 Results & Analysis Summary

Core Content Overview

This report provides an analysis of Geo Energy Resources Ltd (GEO) for the first quarter of 2018, including financial performance, outlook, valuation, and investment recommendations. The analysis is conducted by Phillip Securities Group, with key insights from the company's performance and strategic direction.

Key Financial Highlights (1Q18)

• Revenue: US$90.5 million, down 8.8% YoY from US$99.3 million in 1Q17.
• Gross Profit: US$21.9 million, down 13.5% YoY.
• EBIT: US$19.6 million, down 9.8% YoY.
• Net Profit (PATMI): US$9.0 million, down 38.6% YoY from US$14.6 million in 1Q17.
• Production Volume: 1.9 million tonnes, 17.3% of the annual target of 11 million tonnes.
• Average Selling Price (ASP): US$46.5/tonne, up 17.7% YoY.
• Cash Cost: US$33.4/tonne, up 27.0% YoY.
• Closing Price: SGD 0.225.
• Target Price: SGD 0.41 (revised from SGD 0.47).
• Forward P/E: 10x (average of regional peers).
• Exchange Rate (USD/SGD): 1.36.

Main Points & Analysis

Positive Aspects

• Favourable Coal Prices: The ICI 4,200 GAR price rose by 12% to US$48/tonne in 1Q18, and is expected to remain stable at around US$40/tonne over the next three years.
• Strategic Acquisitions: Management remains optimistic about potential near-term acquisitions, particularly low calorific value coal mines with reserves between 50-60 million tonnes.
• Cash Position: As of March 2018, GEO held US$248 million in cash, which supports its strategy of fast cash cycle and asset monetisation within 5-6 years.

Negative Aspects

• Revenue & Profit Misses: 1Q18 revenue and net profit missed expectations due to lower production volume and higher cash costs.
• Cash Cost Increase: The production-weighted average strip ratio is expected to rise to 3.9 in FY18, increasing cash cost to US$30.5/tonne (from US$27.6/tonne).
• EPS Revision: FY18e EPS is revised down to 3.0 US cents (from 3.5 US cents).

Financial Forecast (FY18e & FY19e)

Valuation & Investment Recommendation

• Valuation Method: Forward P/E of 10x.
• Target Price: SGD 0.41 (revised from SGD 0.47).
• Recommendation: Maintain BUY call, based on revised forecasts and stable coal prices, despite lower earnings expectations.

Strategic Outlook

• Acquisition Strategy: GEO is actively seeking assets that can generate a 20% ROI.
• Asset Monetisation: The company aims to monetise assets within 5-6 years to avoid long-term holding costs.
• Production Plan: 8 million tonnes from SDJ mine and 3 million tonnes from TBR mine, with TBR contributing significantly due to its high strip ratio.

Key Financial Ratios

• Dividend Yield: 4%.
• ROE: 23% in FY18e, expected to rise to 27% in FY19e.
• ROA: 7% in FY18e, expected to increase to 9% in FY19e.
• Net Debt/Net Cash: FY18e is expected to show a net cash position of SGD 13 million (from SGD 277 million in FY17).
• Gearing: 50% in FY18e, expected to decrease to 45% in FY19e.

Conclusion

Despite missing revenue and profit targets in 1Q18 due to lower production and higher costs, Geo Energy Resources Ltd remains a Buy recommendation based on its strong cash reserves, stable coal prices, and strategic focus on acquisitions and asset monetisation. The revised forecasts for FY18e reflect the higher costs, but the forward P/E remains unchanged at 10x, supporting the Buy rating with a lower target price. The company is expected to benefit from the ongoing favourable coal price environment and is well-positioned for future growth through strategic asset acquisitions.