Sakari Resources Ltd - Execution should be on track (DBSV)

HOLD S$1.99 STI : 2,697.98

Price Target : 12-Month S$ 2.20 (Prev S$ 2.30)

Reason for Report : Field visit to mines

Potential Catalyst: Weather related demand/ supply shocks

DBSV vs Consensus: Our FY12-13F EPS estimates are lower than consensus on lower coal price and margin assumptions

• Mine visit leaves us confident about volume growth prospects, especially at Sebuku

• However, we lower Jembayan ASP assumptions for FY12 as sub-bituminous market loses steam

• Cut FY12 EPS estimate by 6%, maintain HOLD with slightly lower TP of S$2.20

Mine operations inspire confidence. We visited Sakari’s mines at Sebuku and Jembayan in East Kalimantan recently and returned more confident about the volume growth prospects. Sebuku Northern Leases will be the key volume driver and expansion plans are already ahead of schedule. At Jembayan, the growth profile is not as exciting, though, partly due to infrastructure constraints and partly as a measure to go slow amid a well-supplied sub-bituminous coal market.

Expect reserve upgrades in 2H12. Drilling programme at Sebuku Northern Leases is well in progress and we should expect an update on resource/ reserve numbers at Sebuku in 2H12. Initial estimates of resources stand at about 30-40m tons. At Jembayan, 85% of the concession area has been explored, while the current reserves number pertains to about 40% of the area, and hence incremental upgrades to reserves can be expected.

Earnings remain vulnerable to coal price changes. Coal prices have been on a seasonal decline in 4Q11, down 6% QTD to US$114 per ton. While this is expected and does not impact our benchmark coal price estimates, we ascribe a higher discount to Jembayan coal in FY12, as the subbituminous market may not be as tight as earlier expected, with imports from India on a slower growth trajectory. As a result, we cut our FY12 EPS estimate by 6.3% and lower our TP to S$2.20. Maintain HOLD, as earnings remain vulnerable to coal price changes amid macro uncertainties. However, we might turn buyers of the stock at levels below S$1.80 as we reckon SAR is unlikely to trend towards 2008-09 trough valuations again, given a better execution track record, a more robust volume growth profile and potential for improved margins from increased sales of higher quality Sebuku coal.