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Regional coal
Defensive short term; Leverage long term
Event
The ASEAN coal names have outperformed the Chinese by 18% on a 6- and 12-
month view (up 21-24% in absolute terms) however YTD have underperformed
by 4%. Given the seasonal weakness in Q2/Q3 in the global coal markets, we
expect China’s defensive characteristics to lead to further outperformance over
the next quarter. However, this should provide a buying opportunity for the
ASEAN names going into 2012 as we remain bullish on their outlook given their
leverage to coal prices, increasing margins and production growth.
We have downgraded our 2011-12 global coal companies’ earnings forecasts by
15-20% and price target by about 5-15%, after the recent Japanese earthquake
that resulted in a JFY11 US$130/t coal price settlement vs. our estimate of
US$145/t as well as a continuous rise in oil prices. However, we continue to see
consensus upgrades of 5-10% in 2011-12. This is with the exception to our
downgrades is SAR where we upgrade our price target from S$3.4 to S$3.8 post
the boundary approval. We have also upgraded Banpu to Outperform following
recent underperformance and resolution on Daning mine.
Over the next quarter we believe it makes sense to gain exposure to those
companies with catalysts, strong production growth, low oil price exposure, low
open-coal price exposure, attractive valuations, and stock-specific catalysts.
SAR, PTBA and Shenhua are our key picks within the space.
Impact
Short-term pressure on Newcastle price. We believe that the recent JFY11
coal price settlement at US$130/t is positive vs consensus expectation of
US$120/t. However, we highlight the potential downside risks to the short-term
spot Newcastle coal price over the next 3-6 months, which is mainly driven by the
seasonally weaker demand from the Northern Hemisphere, improving availability
of hydro power in China, and stronger production from Australia and Indonesia
during the dry season. The greatest risk to our cautious short-term outlook is a
demand-driven oil price rally.
Medium-term demand global coal story remains robust. We continue to
expect the global seaborne thermal market to remain in deficit in 2012-13 by
about 5mt, driven by increasing electrification in India and Indonesia. Further, we
expect Japanese demand to rebound, Chinese imports to remain robust (given
the increasing Chinese cost curve), and European demand to improve given an
improving economy and declining nuclear usage.
Outlook
Short term, we go defensive. We like those names with production growth, low
coal and oil price exposure (or which have stock specific catalysts), which include
SAR, PTBA, and Shenhua.
Medium term, ASEAN names are still our preference for price exposure.
Whilst we highlight the short-term spot pricing risks, we believe the medium-term
story remains robust and we prefer those names with relatively low oil price
exposure, high open-price exposure going into 2012, and attractive valuation.
SAR, PTBA, and Harum are our key picks within the space to benefit from a
stronger medium-term story. The ASEAN coal sector currently trades on 10x
2012 PER vs. the Chinese at 12x. We reiterate our Outperform stance on the
sector, despite the downward earnings revision.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Regional coal
Defensive short term; Leverage long term
Event
The ASEAN coal names have outperformed the Chinese by 18% on a 6- and 12-
month view (up 21-24% in absolute terms) however YTD have underperformed
by 4%. Given the seasonal weakness in Q2/Q3 in the global coal markets, we
expect China’s defensive characteristics to lead to further outperformance over
the next quarter. However, this should provide a buying opportunity for the
ASEAN names going into 2012 as we remain bullish on their outlook given their
leverage to coal prices, increasing margins and production growth.
We have downgraded our 2011-12 global coal companies’ earnings forecasts by
15-20% and price target by about 5-15%, after the recent Japanese earthquake
that resulted in a JFY11 US$130/t coal price settlement vs. our estimate of
US$145/t as well as a continuous rise in oil prices. However, we continue to see
consensus upgrades of 5-10% in 2011-12. This is with the exception to our
downgrades is SAR where we upgrade our price target from S$3.4 to S$3.8 post
the boundary approval. We have also upgraded Banpu to Outperform following
recent underperformance and resolution on Daning mine.
Over the next quarter we believe it makes sense to gain exposure to those
companies with catalysts, strong production growth, low oil price exposure, low
open-coal price exposure, attractive valuations, and stock-specific catalysts.
SAR, PTBA and Shenhua are our key picks within the space.
Impact
Short-term pressure on Newcastle price. We believe that the recent JFY11
coal price settlement at US$130/t is positive vs consensus expectation of
US$120/t. However, we highlight the potential downside risks to the short-term
spot Newcastle coal price over the next 3-6 months, which is mainly driven by the
seasonally weaker demand from the Northern Hemisphere, improving availability
of hydro power in China, and stronger production from Australia and Indonesia
during the dry season. The greatest risk to our cautious short-term outlook is a
demand-driven oil price rally.
Medium-term demand global coal story remains robust. We continue to
expect the global seaborne thermal market to remain in deficit in 2012-13 by
about 5mt, driven by increasing electrification in India and Indonesia. Further, we
expect Japanese demand to rebound, Chinese imports to remain robust (given
the increasing Chinese cost curve), and European demand to improve given an
improving economy and declining nuclear usage.
Outlook
Short term, we go defensive. We like those names with production growth, low
coal and oil price exposure (or which have stock specific catalysts), which include
SAR, PTBA, and Shenhua.
Medium term, ASEAN names are still our preference for price exposure.
Whilst we highlight the short-term spot pricing risks, we believe the medium-term
story remains robust and we prefer those names with relatively low oil price
exposure, high open-price exposure going into 2012, and attractive valuation.
SAR, PTBA, and Harum are our key picks within the space to benefit from a
stronger medium-term story. The ASEAN coal sector currently trades on 10x
2012 PER vs. the Chinese at 12x. We reiterate our Outperform stance on the
sector, despite the downward earnings revision.
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