Current S$2.08
Target S$2.71
Previous Target S$2.99
A recent visit to SAR’s mines strengthens our conviction of its expansion-empowered growth. Sebuku is the crown jewel that should propel SAR’s next phase of growth. Steady earnings growth, generous dividends and undemanding valuations make this a stock to own.
We keep our revenue forecasts but cut FY12-13 EPS by 9-20% as our previous cost assumptions were too mild. As a result, our TP, still based on 9.6x CY13P/E, drops. Maintain Outperform, nevertheless, as its risk-reward is attractive.
Sebuku’s promise
We are convinced that Sebuku will be the group’s major earnings driver over the next three years. Northern Leases have surpassed expectations with initial shipments starting earlier than expected.
With profit margins estimated to be double those of Jembayan, the mine’s ramp-up over the next three years should boost overall profitability.
How to support longer-term growth
We believe that coal prices could soften in the near term on the back of slower Indian demand and a spike in supply from Indonesia given favourable weather conditions.
SAR will make use of this time to review its operations and long-term growth strategy. For instance, it is considering the use of larger equipment to overcome infrastructure bottlenecks at Jembayan. These initiatives, hopefully, will prepare the group for capitalising on higher coal prices when markets tighten.
Attractive valuations
We see value following the stock’s recent decline. SAR trades at 10x CY12 P/E (1.3 std deviations below mean), and offers an estimated 45% 3-year EPS CAGR and a generous 5.9% dividend yield.
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