Straits Asia Resources: Courtship in the works?

By Lee Wen Ching
Mon, 9 Feb 2009, 09:07:49 SGT

Straits Resources Ltd’s (SRL) divestment of its 47.1% stake in Straits Asia Resources Ltd (SAR) had led to speculation over a possible takeover offer for SAR. Press reports have alluded to possible interest from several strategic investors, including Noble Group Ltd and Indika Energy. Our preliminary assessment of SRL’s short term debt profile suggests that it has no need to sell its entire 47.1% stake in SAR in order to meet its near term debt repayment obligations. Nevertheless, we view the keen interest from strategic investors as a testimony of SAR’s attractive valuations and viable assets. We maintain our BUY rating on SAR with S$1.35 fair value estimate. As for Noble, it is moving from an “asset-light” business model to an “asset-medium” model and could use present depressed valuations to execute its plans. Historically, it has taken up only minority interests in its investments and is likely to continue with this approach. As such, even if Noble emerges as a potential investor in SAR, we do not expect it to launch a takeover offer. We have a BUY rating on Noble with S$1.58 fair value estimate.

Igniting the takeover fever. As part of its strategic review to divest all or part of its 47.1% stake in Straits Asia Resources Ltd (SAR), parent company Straits Resources Ltd (SRL) has been accepting proposals from various parties, and we understand that the closing date for submissions ended last week. This has prompted speculation of a possible takeover offer being triggered should the new buyer cross the 30% mark. While neither SRL nor SAR has commented on the deal, there have been press reports alluding to possible interest from Singapore listed Noble Group Ltd and Indonesian coal miner Indika Energy.

Valuations are attractive.... In our view, SAR’s current valuations are compelling. The embattled stock market has dragged the shares down to just S$0.90 from its peak of S$4.30 a year ago, despite 9M08 earnings surging 346%. Its FY09F PER currently stands at 2.3x, way below the 11x PER price tag that Chinalco and Alcoa forked out for their stake in mining company Rio Tinto just a year ago.

And so are its assets. Furthermore, SAR’s assets are attractive. It has two coal mines in Indonesia – one at Sebuku with 384Mt of resources and another at Jembayan with 254Mt of resources. The low cost appeal of Indonesian coal (which is approximately 20% cheaper than China’s) has attracted strong demand from buyers, particularly from China and India. Owning a stake in SAR would tantamount to securing a part of its prized assets and strong future earnings.

Will SAR be taken over? Given the above, it is not surprising that several suitors could be knocking at SRL’s door for its stake in SAR. However for now, it would be premature to guess whether SRL’s divestment exercise will lead to a takeover offer for SAR. Based on our preliminary assessment of SRL’s short term debt profile, we think that SRL has no need to sell its entire stake in SAR in order to meet its near term debt repayment obligations.

Interest from strategic investors is a strong testimony. We view the strong interest in SAR as a testimony of its attractive valuations and viable assets. Investment merits lie in its strong dividend yield, robust earnings growth and order book visibility. Maintain our BUY rating with S$1.35 fair value estimate.

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