• Revenue and PATMI missed our expectations due to lower ASP.
• 1H19 production completed half of 25mn tonnes FY19 target.
• Sluggish coal price due to the market downturn.
• We cut FY19e EPS to 1.3 US cents (previously 1.8 US cents) due to lower coal ASP assumption. Based on the unchanged peer average forward PER of 10x and the updated FX rate (USD/SGD) of 1.39x, we downgrade our recommendation to NEUTRAL with a lower target price of S$0.19 for FY19 (previously S$0.24).

The Positives

Complete 50.4% of FY19 production target amid a moderate fall in cash cost. In 2Q19, the quarterly production volume arrived at 5.5mn tonnes, together with 7.1mn tonnes of output in 1Q, the 1H19 coal production completed half of 25mn tonnes annual target. The cash cost in 2Q19 dropped by 5.5% YoY but was mildly higher than 1Q19. The guidance for the full year cash cost ranges between US$25/tonne to US$26/tonne.

Profiting from equity investments. GEAR deployed the cash on 10% stake of Westgold at A$1.885 and 25% stake of Stanmore coal at 25.5% at A$0.95 in 2018. As of 22-Aug, the closing price of Westgold and Stanmore coal was A$1.875 and A$1.45, respectively.

The Negatives     

Sluggish coal price due to the market downturn. In 2Q19, the ICI 4 coal price averaged at US$37.5/tonne (down 15.9% YoY and 2.8% QoQ). ASP fell by 11.7% YoY but up 7.4% to US$37.2/tonne.

Outlook

The 2H19 coal market is expected to endure relatively low prices. Even though the 10.6% YoY growth of output and 7% YoY lower in cash cost, the overall performance will be dragged by the significant correction in ASP that is expected to decrease by 15% YoY this year. We lower the FY19e ASP to US$ US$38/tonne (Previously US$40/tonne) (4,200 GAR).

Downgrade to NEUTRAL with a lower TP of S$0.19 (previously S$0.24)

We lower FY19e EPS to 1.3 US cents (previously 1.8 US cents) due to lower ASP assumptions. Based on the unchanged peer average forward PER of 10x and the updated  FX rate (USD/SGD) of 1.39x, we downgrade our recommendation to NEUTRAL with a lower target price of S$0.19 for FY19 (previously S$0.24).

Ceasing coverage

Following this report, we will be ceasing coverage on Golden Energy and Resources due to the reallocation of internal resources.

Source: Phillip Capital Research - 23 Aug 2019