Straits Asia Resources (DMG)

Straits Asia Resources: Share price has performed up to expectations (NEUTRAL,
S$3.10, TP S$3.08)

Stock price up 20% since 20 Apr 11, downgrade to NEUTRAL. Straits Asia Resources has enjoyed a solid share price run since 20 Apr 11 when we upgraded our call to a BUY. However, we believe all the good news has already been priced in: (1) Sebuku’s Northern Leases permits have been issued – this takes away licensing risks which we believe have been bugging investors. (2) High coal prices averaging US$125/tonne YTD have been factored in our forecasts. Though we are forecasting a strong 90/91% net profit growth for FY11/12, we are downgrading the counter to NEUTRAL on the back of lack of visible catalysts for further share price upside. Valuations currently appear fair with FY11 P/E of 16.4x at 10% premium to peer average. We believe investors should await a better entry level, with higher than expected coal prices, production volume and/or coal reserves serving as positive catalysts.

Recent meeting with management suggests Northern Leases operations are on track. Tanah Putih pit’s Stage 1 plan involves immediate extension of the pit to allow ramp up in Sebuku’s production to commence in 2H11. Stages 2 and 3 involve creation of additional pits, and are targeted to be ready by late 2012. These additional pits will serve as a contingency plan in the event of bad weather as well. Separately, we expect to have a reserves/resource update for the Northern Leases in ~a year’s time. Management has a resource target of 30-50m tonnes, while we are using ~30m tonnes for our reserves assumptions. Higher than expected reserves/resources could serve as an immediate catalyst for the counter.

Downgrade to NEUTRAL as valuations appear fair. We forecast a strong 90/91% net profit growth for FY11/12 driven by both higher volumes and ASPs. However, trading at 16.4x FY11 P/E, the counter appears to be fully valued. Our TP is unchanged at S$3.08 and we downgrade our call to NEUTRAL.