By Lee Wen Ching
Thu, 25 Feb 2010, 09:45:14 SGT

Straits Asia Resources’ (SAR) FY09 net profit of US$133.5m (up 7.3%) was in line with our expectations but below consensus. Revenue grew 27.9% to US$748.4m on stronger coal prices and higher volumes; but cost of production came in higher than expected. The group’s cash position dived to US$56.8m from US$170.6m a year ago on loan repayments and heavy capex, which we expect will continue to weigh in FY10. Again, SAR did not provide updates on its FY10 contracts. We are concerned over its lack of earnings visibility and lingering succession planning concerns, which we deem instrumental in shaping the group’s nascent growth phase. We are downgrading SAR to SELL and reduce our fair value estimate to S$1.73 on lower earnings projections.

FY09 results hurt by several one-offs. Straits Asia Resources’ (SAR) FY09 net profit of US$133.5m (up 7.3%) was in line with our expectations but below consensus. The group delivered a 27.9% growth in revenue to US$748.4m, driven by stronger thermal coal prices and higher production volumes. Gross profit improved by 32.0% to US$300.3m; bottom line, however, was tainted by several non-recurring items such as warrant expenses and a write-off relating to the damaged Jembayan equipment. Excluding these, we estimate that core net profit would have risen by 27.4% to US$157.1m. A final dividend of 2.03 US cents has been declared in line with SAR’s 60% payout policy.

Heavy capex drains cash. SAR’s cash position dived to US$56.8m (including restricted cash) from US$170.6 a year ago on loan repayments (totalling US$86.7m) and heavy capital expenditure. Investing cash outflow ballooned to US$154.4m in FY09 from US$65.1m a year ago as the group incurred progressive payments on Northern Leases and undertook mud stabilisation works at Sebuku. We expect recurring costs to weigh on FY10 capex.

Still lacking visibility. SAR again refrained from providing any updates on its FY10 contracts and pricing. This leaves some discomfort in terms of the group’s earnings visibility, as it suggests that the group has not made significant progress in pricing its output although we are already approaching the end of 1Q10 (management had previously planned to price the bulk of its FY10 output by 4Q09). The lack of commitment leaves SAR’s earnings vulnerable to volatility in the thermal coal spot market, which has been on a downtrend since hitting a YTD high of US$99/ton in Jan (Exhibit 1).

Succession planning a concern. We previously flagged concerns over CEO Mr Richard Ong’s employment contract which expires in May. No updates have been given on this front. The lack of an official clarification raises suspicions that the contract may not be extended. We view this negatively as Mr Ong has played a pivotal role in SAR’s growth. His possible departure leaves doubts over the group’s expansion plans, which is still in nascent stages. We downgrade SAR to SELL on (i) the lack of earnings visibility and (ii) the group’s murky succession plans, which we deem instrumental in shaping its outlook. We have cut our earnings projections on lower ASP and higher cost assumptions, bringing our fair value estimate to S$1.73.