lump  in  share  price  presents  buying  opportunity.  SAR's  share  price  has declined 51% from its end Feb 12 peak due to (1) declining coal prices, (2) poor results,  (3)  negative  regulatory  news  from  Indo,  and  (4)  weak  economic sentiment. We lower our FY12 coal price assumptions by 10% to US$102/tonne and  consequently  our  FY12  PATMI  is  lowered  by  33%  to  US$119m.  We  think most  of  the  negatives  have  been  priced  in,  with  coal  prices  possibly  seeing limited  downside  from  current  levels  (Newcastle  at  US$84/tonne).  We  believe catalysts  for  share  price  upside  may  come  from  rising  coal  prices  as  well  as stronger  results  in  2H12.  Maintain  BUY  with  lower  TP  of  S$2.00  (from  S$2.50 previously) on 15.5x FY12 P/E.

Lowering our FY12 coal price forecast; prices may bottom soon. Coal prices averaged  US$112/tonne  for  1Q12  and  US$96/tonne  for  2Q12  so  far.  Current coal price stands at US$84/tonne.  Channel checks and newswires suggest coal prices  may  see  support  at  current  levels,  given  the  cost  structure  for  US  coal exports  to  Asia  is  ~US$80-85/tonne.  We  assume  3Q12  and  4Q12  coal  price  to average US$95/tonne and  US$105/tonne respectively, leading to FY12 average of  US$102/tonne  (US$113/tonne  previously).  Our  FY12  PATMI  is  lowered  by 33% to US$119m. Our FY13 coal price assumptions stand at US$115/tonne.

Prudent  strategy  amidst  weak  coal  prices.  SAR  is  doing  its  best  amidst  the current  weak  coal  price  environment  by  improving  margins  through  increasing production of its high-margin Sebuku coal while slowing production growth of its low-margin  Jembayan  coal,  and  at  the  same  time  reducing  operating  costs  at Jembayan.  Our  expectation  of  coal  prices  and  production  to  increase sequentially towards 4Q12 bodes well for SAR's profitability. 

Valuations  attractive,  negatives  priced  in.  SAR  remains  attractive  trading  at 9.9x  FY12  P/E  with  dividend  yield  of  6%.  Our  TP  of  S$2.00  is  based  on  15.5x FY12  P/E,  which  is  in-line  with  its  3  year  average.  Downside  risks  to  our  call include lower than expected coal production and coal prices.

Source: OSK