KGI Securities Singapore analyst Alyssa Tee has lowered her target price to 68 cents from 72 cents for Geo Energy Resources RE4 (Geo Energy) given the lower-than-expected production volume and current coal prices.
However, Tee still maintains her “outperform” call given the company’s cost-efficient model, stable demand, steady coal prices and accelerated growth.
Tee notes that Geo Energy is “navigating price pressures with cost efficiency.”
Production volume totalled 2.8 metric tonnes (MT), largely from Sungai Danau Jaya (SDJ) and Tanah Bumbu Resources (TBR), while the PT Triaryani (TRA) mine contributed 0.3 MT. Stable coal sales of 3.2 MT and a resilient cost model contributed to a healthy cash profit margin of 23%, Tee adds.
Despite maintaining stable coal sales of 3.2 MT in 1H2024, Geo Energy’s revenue declined by 29% y-o-y to US$169.4 million ($219.6 million), largely due to lower ICI4 coal prices, averaging US$56.13 per tonne compared to US$70.46 in 1H2023, Tee notes.
Tee recognises that higher general and administrative expenses of US$6.2 million and finance costs of US$9.9 million have impacted Geo Energy’s financials, following its acquisition of PT Golden Eagle Energy Tbk.
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While production was negatively affected by unfavourable weather conditions in the first half of 2024, cash profit per tonne remained robust at US$11.94, Tee notes. This reflects a cost-efficient model where cash costs decrease alongside lower ICI4 prices, Tee adds.
Despite a 14% y-o-y decrease in net profit to US$24.2 million for 1H2024, Tee notes that the company has declared an interim dividend of 0.2 cents per share, representing an 11.4% payout.
“While global efforts are underway to transition to renewable energy, coal remains a crucial source of power, particularly in developing nations,” Tee adds.
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According to the International Energy Agency (IEA), coal contributes to more than one-third of electricity globally. Tee notes that Geo Energy expects coal demand to stabilise in the short term driven by energy affordability and economic growth challenges, especially in key economies such as China and India.
With demand and supply for coal in balance, Tee expects coal prices to remain steady in FY2024. Therefore, Tee is of the opinion that Geo Energy’s potential to boost its revenue will depend more on increasing production volume rather than benefiting from changes in price.
“The company has revised its full-year production forecast from the initial 10-11 MT down to 8-9 Mt, having produced 2.8 MT in 1HFY2024,” and “July’s production levels indicate that the company is on track to meet this new target,” Tee adds.
Additionally, Tee is of the belief that Geo Energy is experiencing accelerated growth through infrastructure investment and diversification.
Tee states that Geo Energy has recently signed a US$150 million engineering, procurement and construction (EPC) contract with CCCC first harbour consultants and Norinco international cooperation to build a 92 km hauling road and jetty in South Sumatera and Jambi Province in Indonesia.
“This infrastructure will boost TRA mine's transport capacity to 40-50 MT per year, with 25 MT allocated for TRA,” and “the project's deferred payment mechanism minimises upfront cash outlay, allowing the infrastructure to generate revenue before payments begin,” Tee says.
According to Tee, the project is expected to be completed in early 2026, scaling up production and reducing logistical costs significantly, potentially generating US$400 million to US$500 million in annual earnings before interest, taxes, depreciation and amortisation (ebitda).
The target price is calculated based on a discounted cash flow (DCF) valuation using a weighted average cost of capital (WACC) of 13.5%.
As at 4.43pm, units in Geo Energy are trading flat at 28.5 cents.
