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Coal
Thermal defying the odds
Raising global coal price assumptions by 5-15% in JY12/13
Our global commodities team has upgraded our seaborne thermal forecasts
by 5-15% to US$115/t (JY12) and US$130/t (JY13). This is due to growing
confidence in China over the next 6 months – not because of ongoing
strength in industrial production – but rather, we see the loss of hydro power,
seasonally stronger demand and tighter-than-expected supply (increased
safety checks and railway maintenance) as key drivers. Further, we see
demand in Europe and Japan staying solid in 2012 due to nuclear disruptions
and Indian demand remaining strong. We also upgrade our long-term cost
assumption from US$80/t to US$85/t. Inherent in our commodities team
outlook is the belief that we do not enter into a GFC II.
Asean smashed: SAR and Harum top (brave) picks
We raise our 2012/13 forecasts by 3% and 8% on the back of higher coal
price assumptions, leading to the sector trading on 6-7x PER in 2012/13E vs
an historical trading range 12-13x PER. Whilst positive on the sector, our
order of preference for more liquid stocks is SAR and Harum Energy.
SAR: We think the share price correction is overdone, particularly for SAR,
given it is on 4-5x PER in 2012E. This implies an US$85/t coal price in 2012
vs the coal futures curve of US$120-125 (or vs the sector roughly pricing in
US$100/t.) We see 4Q11 results as a catalyst, as we think the market is
underestimating the ‘triple kicker’ of higher Sebuku production, ASP and lower
costs from the Northern leases, which lead us to be 18% above 2012
consensus.
Harum Energy: We continue to like Harum given its 28% 3-year production
CAGR, exploration upside and attractive valuation trading on 7x PER 2011E,
supported by a net cash position balance sheet position.
Ones to watch: Adaro on the upside; Bumi and Bayan Resources on the
downside. Adaro has been out of our top picks in the past 12 months as we
struggled to see it achieving 80mt organically. Given the recent share price
correction and recent acquisition announcement, we now feel that this risk is
more in the price. Management’s strategy is for a further acquisition, and we
would be a buyer on share price weakness. We see the greatest risk to
earnings at Bayan Resources, given its high cost structure, and Bumi
Resources on high leverage at the operating and founding shareholder levels.
Chinese Coal – Staying with Shenhua
We think the Chinese coal market could remain tight with thermal power
demand expected to surge 20%+ YoY in 4Q11 due to the poor availability of
hydro. The key risk is a huge capitulation in IP, and therefore we remain
defensive with our order of preference being 1) Shenhua, 2) Yanzhou and 3)
China Coal.
We believe Shenhua has the best of both worlds: On one hand, a ~50% spot
exposure providing potential spot upside, on the other hand limited downside
given contract prices, an integrated railway and power business, and its
attractive valuation trading on 10.1x PER for 2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Coal
Thermal defying the odds
Raising global coal price assumptions by 5-15% in JY12/13
Our global commodities team has upgraded our seaborne thermal forecasts
by 5-15% to US$115/t (JY12) and US$130/t (JY13). This is due to growing
confidence in China over the next 6 months – not because of ongoing
strength in industrial production – but rather, we see the loss of hydro power,
seasonally stronger demand and tighter-than-expected supply (increased
safety checks and railway maintenance) as key drivers. Further, we see
demand in Europe and Japan staying solid in 2012 due to nuclear disruptions
and Indian demand remaining strong. We also upgrade our long-term cost
assumption from US$80/t to US$85/t. Inherent in our commodities team
outlook is the belief that we do not enter into a GFC II.
Asean smashed: SAR and Harum top (brave) picks
We raise our 2012/13 forecasts by 3% and 8% on the back of higher coal
price assumptions, leading to the sector trading on 6-7x PER in 2012/13E vs
an historical trading range 12-13x PER. Whilst positive on the sector, our
order of preference for more liquid stocks is SAR and Harum Energy.
SAR: We think the share price correction is overdone, particularly for SAR,
given it is on 4-5x PER in 2012E. This implies an US$85/t coal price in 2012
vs the coal futures curve of US$120-125 (or vs the sector roughly pricing in
US$100/t.) We see 4Q11 results as a catalyst, as we think the market is
underestimating the ‘triple kicker’ of higher Sebuku production, ASP and lower
costs from the Northern leases, which lead us to be 18% above 2012
consensus.
Harum Energy: We continue to like Harum given its 28% 3-year production
CAGR, exploration upside and attractive valuation trading on 7x PER 2011E,
supported by a net cash position balance sheet position.
Ones to watch: Adaro on the upside; Bumi and Bayan Resources on the
downside. Adaro has been out of our top picks in the past 12 months as we
struggled to see it achieving 80mt organically. Given the recent share price
correction and recent acquisition announcement, we now feel that this risk is
more in the price. Management’s strategy is for a further acquisition, and we
would be a buyer on share price weakness. We see the greatest risk to
earnings at Bayan Resources, given its high cost structure, and Bumi
Resources on high leverage at the operating and founding shareholder levels.
Chinese Coal – Staying with Shenhua
We think the Chinese coal market could remain tight with thermal power
demand expected to surge 20%+ YoY in 4Q11 due to the poor availability of
hydro. The key risk is a huge capitulation in IP, and therefore we remain
defensive with our order of preference being 1) Shenhua, 2) Yanzhou and 3)
China Coal.
We believe Shenhua has the best of both worlds: On one hand, a ~50% spot
exposure providing potential spot upside, on the other hand limited downside
given contract prices, an integrated railway and power business, and its
attractive valuation trading on 10.1x PER for 2012E.
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