By Lee Wen Ching
Fri, 5 Mar 2010, 09:02:54 SGT

Straits Asia Resources Ltd (SAR) hosted a post FY09 results conference call last evening, during which its new CEO Mr Martin Purvis allayed concerns over management continuity. 70% of its FY10 output has been committed to date, but as the pricing of most of these contracts is index-linked, the group’s earnings remain exposed to price volatility. Management guided for lower thermal coal prices in the range of “high US$60s to mid US$70s” in FY10 vs. its ASP of US$82.14/ton in FY09. We expect higher production volumes to partially offset the impact of lower selling prices on the group’s revenue. On the operational front, production at the re-zoned Sebuku area looks to be delayed pending approvals from the Indonesian government, while a replacement facility for the failed Jembayan loading facility is being planned. We have fine-tuned our estimates and lift our fair value estimate to S$1.76 (from S$1.73). Maintain SELL.

Introduces new CEO. Straits Asia Resources Ltd (SAR) hosted a conference call last evening to discuss its FY09 results (released on 24 Feb 10), during which the group’s new CEO Mr Martin Purvis was introduced to the financial community. Mr Purvis, who succeeded Mr Richard Ong with effect from 1 March 2010, has been a director of SAR since its IPO in Nov 06 and is also the CEO of SAR’s parent company PTT Asia Pacific Mining. Mr Purvis has had over 25 years of experience in the resource industry and has been working with Mr Ong in pioneering SAR’s growth. During the call, SAR highlighted that its growth strategy remains unchanged despite the change of management, and allayed concerns over management continuity by stressing its experienced team which continues to run day-to-day operations.

Shift towards floating-rate contracts increases earnings volatility. As a recap, SAR posted a 7.3% growth in FY09 earnings to US$133.5m on higher coal prices and production volumes. Average selling price (ASP) rose to US$82.14/ton from US$71.00/ton a year ago while the group increased its sales to 9.21m tonnes from 8.59m tonnes. Moving into FY10, management guided for weaker ASP in the range of “high US$60s to mid US$70s” amid the current environment of lower energy prices. We expect higher production volumes to partially offset the impact of lower selling prices on the group’s revenue. 70% of its FY10 output has been committed to date, but the pricing of these contracts is mostly index-linked. The group’s shift to floating-rate contracts from fixed-rate contracts exposes its earnings to price risk.

Operational updates. Production at the re-zoned Sebuku area looks likely to fall behind schedule. Having obtained the permission to extend its mining boundary in Aug 09, the group now faces another roadblock from the Indonesian government in the form of land use approvals. SAR hopes to obtain clearance and commence work on the re-zoned area by the middle of 2010, but a potentially lengthy approval process could impede its plans. Over at Jembayan, SAR is working on a replacement for the second loading facility that failed in Oct 09. It has budgeted US$20-25m for the replacement facility and targets to provide more updates on this front in 2Q10. We have fine-tuned our estimates to incorporate management’s latest guidance, leading us to lift our fair value estimate to S$1.76 (from S$1.73). We maintain our SELL rating on SAR.