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fanoflynch

$Geo Energy Res(RE4.SI) As a part-time-wannabe-analyst-without-a-blog on Geo from the desk of my home, this is my report.

About Geo
The business model of Geo is very simple and easy to understand, with good business climate currently, and a strong balance sheet, income statement, cash flow, dividend payout and good management (what's there not to love?). That is why I am a strong proponent of this company and sometimes a little too enthusiastic.

Business Model
Their main business model is holding the coal mines as an asset, in which they hire a mining contractor (BUMA), to mine the coal and sell it to an off taker (ECTP for SDJ mine). No capital expenditure required to mine the coal, with a mining specialist doing the job for you. Guaranteed sales with low credit risk due to the offtake agreement with the giant commodity partner as well. BUMA is paid per tonne based on a variable fee, depending on the coal prices. Higher coal price, they are paid more. However, Geo will still stand to make more profits as they sell for even more than the marginal increase in payment to BUMA (i.e. if they pay $1 more to BUMA per tonne, their selling price increases by more than $1). With a business model like that, it is also very easy to scale. Geo has just announced the US300M notes, which will allow them to acquire more mines and deploy this same business model, just like a photocopying machine.

Coal reserves
At such a rate of coal production, they only have about 100m tonnes of proven and probable reserves and so people feel that they will run out of coal in a few years. This will not be an issue as they are still acquiring more mines to take advantage of the uptrend in coal prices, boosting reserves. Also, this uptrend in coal prices may last a few years, but it won’t last forever. So why get concerned about whether they have 1B in reserves or 100m in reserves when what is important is what you PRODUCE and SELL, not how much coal you have? 1B in reserves but if you can only produce 12m tonnes annually, then that is all you are going to earn. This company is valued at US265m market cap with a discounted future cash flow of more than US$600M. You can argue that this is dependent on coal price and all, but I think the margin of safety here is wide enough to rest your worries.

Coal production
Currently, they have 2 mines, SDJ and TBR. At max annual production, SDJ can produce about 10 million tonnes for them, and TBR 5 million tonnes. This year, they were targeting to hit 8 million for SDJ, 2 million for TBR, hence the 10 million projection. However, due to TBR acquisition finalising later than expected, TBR’s output would probably be less than 2 million. However, SDJ’s output is still on track for 8 million. So if you are wondering if their production will be more than 8 million, 8 + anything is more than 8 million (math). Their contract with the mining contractor will also mean that there will be penalties if production falls short, hence 8 million is very likely. Going forward, with an annual max output of 15 million, what do you think their likely annual production will be? 12-14 million tonnes does not sound too far-fetched to me.

Offtake agreement concerns
ECTP is currently offtaking for SDJ, and they will announce the offtaker for TBR in due time (with certainty). Offtake agreement will ensure sales for their production, and mitigation of credit risk as they do not have to deal with individual small buyers.

Dividend
In the last year, they made 2.2 cents per share and paid out 1 cent per share. Do you think they are likely to pay one dividend and then stop paying for future years? This year, when they make 7-8 cents per share, do you think paying out 1 cent per share is doable? Do you think there is room for an increase in dividend? (Probably) What are the implications for yield if they increase their dividend at current share prices? (Up) And so what will happen to their share price? (Up).

Indonesian domestic coal demand
Concerns about Indonesia making coal miners shunt production for the domestic coal market would not apply to Geo, as they do not have the agreement with the Indonesian government to produce coal for them, unlike Golden Energy. Hence they are able to mine and freely export their coal to foreign, more lucrative markets aka China. But the Indonesian coal market in my view still serves as a good support for coal demand in the future.

Competitive advantage due to type of coal
Coal is black and contains sulphur, but not all coal are equal. The coal that Geo produces is higher in quality with lower sulphur content, and to me this is their competitive advantage over other coal miners especially from China. GAR4200 is sought after by China, and they will always need it to mix with the locally mined coal in order to meet the governmental environment standards for power plant emissions (PCP turning treehugger these days). Coal still remains one of the cheapest forms of energy, and I doubt China even with its tree-hugging initiatives will completely abolish use of coal for electricity anytime soon. Since they will need low sulphur content to mix, the demand for Geo’s coal will always be there.

Cyclical sustainability
In terms of ability to ride out cyclical waves, they are one of the lowest companies on the cash cost curve, meaning that if coal prices fall, many other coal miners will be in the red before they are affected. Also, don’t forget that their cash cost will fall (slightly) together with coal prices due to their pricing structure agreed with mining contractor BUMA. They have a solid balance sheet as well. If they were able to ride out the last one without such a robust business structure, I think now they are stronger than ever.

Stock Price Targets
This is the part in which most people are interested in, but I think should not be the focus of company analysis. It is the same as asking how high is the sky. There is the discounted cash flow projection (>600m) given by the company, which would imply a stock price in excess of 65 cents. Then there is the easy one I like, which is EPS x P/E. A good rule of thumb I use for P/E would be to compare it to the growth rate of the company. Actually Geo's revenue and profits have been growing at some ridiculous rates in the last year because it is a turnaround story. But let's place a reasonable growth rate of 15% for the foreseeable future going forward. A P/E of 15, multiplied by this year's earnings of 7-8 cents (even if only 6 cents), you can do the math. Okay, let's say you are very pessimistic about this company for whatever reason, and you only award it a P/E of 7.5 (half of growth rate). That's around $0.50? That is my own fair value for the company TODAY. Moving forward, again, their earnings WILL grow with the increased rate of production (and hopefully with coal prices as a tailwind). Will the share price be more than 0.50? (Yes). Might we see P/E expansion due to the growth rate? (Maybe- fast growing companies tend to get a higher P/E). This leads to an exponential increase in the share price. Can you imagine if the earnings grew from here, and the P/E expanded at the same time? I think a dollar is not an outrageous forecast in the longer term. Is holding this for 3 years that hard? The CEO has said in interviews that his goal is to make Geo a US1 billion market cap company. I don't think he is saying that for fun. If Geo is worth SGD 1.35 billion, what is the corresponding share price?

To me, the biggest issue that most people have with such "high" price targets is because they keep comparing it with the CURRENT share price. Well, it is called "UNDERVALUED" for a reason and so we need to take advantage of it in order to gain. They find it unbelievable that a stock priced at 0.29 can ever attain $1.00. I have reframed this in my mind to see it in this way: Assuming Geo is ALREADY trading at fair value of 11x P/E and 5 cents earnings, so 0.55. And someone puts out a price target of $1.00. Will you think it is far-fetched? (Probably not) And then, in a more extreme example, if the stock is currently OVERPRICED and trading at 2.00 today, and someone says it can go to 2.20, will you think it is far-fetched? (Probably not) But I think that the second example would be far-fetched to me, even though it is not a big increase over the last market quotation, because we should always judge a company's worth by its fundamentals and business rather than it's last done stock price. Always remember that its stock market success is limited by its business fundamentals and not it's current stock price today.

Conclusion
With current coal prices hitting new highs and moving into 4Q (which means even higher production) for Geo, I am excited for their 2017 results next February. Of all the concerns I have read about this production volume issue and that offtake agreement, I really hope you guys can see that they are non-issues. Coal price is the biggest challenge moving forward, but that is greatly supported by demand factors. In putting together this report, I have realised that all the individual investor needs to do is to take a good look at their investor presentation, and you will be wondering why you aren’t buying more.

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19 people like this.
ThumbTackInvestor :

Just to substantiate my comment below.
This is from the company's own press release.

Also, lynch, you might wanna relook the production figures again and again. I have reservations about those numbers.
In fact, I have a fair idea of how Q3 production volumes would look like, even before ER.
I don't think the company is going to be able to meet its 10mil production target for 2017, even with TBR coming on in Q4.

liuliu :

Reply to @liuliu : Also, company was very confident in the 10m tonnes production volume last year and this year Q1 in their reports. But after Q2's 1.5tonnes volume, they no longer mention their 10m target in their reports, which indicates the volume wont be looking very good in FY2017. But still, I believe the stock is very undervalued due to current high coal price, and I expect the price gonna maintain high due to China's constant push on their environmental protection measures.

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ThumbTackInvestor :

"Concerns about Indonesia making coal miners shunt production for the domestic coal market would not apply to Geo, as they do not have the agreement with the Indonesian government to produce coal for them, unlike Golden Energy. Hence they are able to mine and freely export their coal to foreign, more lucrative markets aka China. But the Indonesian coal market in my view still serves as a good support for coal demand in the future."

Not true.
It does apply to them.
Initially I thought they'd get ard it as they sell to ECTP and ECTP is the middleman that is responsible for reselling to Indo end users or exporting the coal.
But Indonesian law accords a certain percentage of the mine's output must not be exported, and that's tagged to the mine itself, based on the JORC report on the volume of its reserves.
In short, Geo is not affected currently, but if this limit is increased, then yes, they will be affected too.
They cannot "mine and freely export their coal to foreign, more lucrative markets" without any considerations.

warster :

Might be prudent for investors who don't do their dd to note that geo energy has very high debt, and a change at macro level or a drop in coal price could send it spiraling like ezion.

Not vested for this reason, but at current price there is definitely value but that is certainly some risk to bear

Thought I shld highlight this since it seems like an over optimistic picture this report is painting. Pls dyodd

l0nEr :

Reply to @warster : 1) Pls read the offering circular of the 2022 bonds, there are some terms which could result in a call before the maturity date. The likelihood is not very high at this point.
2) Adaro did not issue a USD bond at the start of 2017, if it did, it probably do not need to pay more than 5.5% (probably in the low to mid 4%), given that Indika is now about mid 5% and Adaro is much much stronger company. I'm not sure if Adaro issued an IDR bonds.
3) At 8%, Geo energy is one of the highest yielding Asia HY bonds in USD, that is not in a distressed situation. It has a B2 rating for a reason, which you can approach Moody's or S&P for the answer.
4) The domestic market obligation (DMO) is not a major factor right now...
5) The new is bonds are yet to be reflected in the historical financial statements (gurufocus)
6) Prepayments from ECTP should be considered somewhat like a debt too..
7) ECTP is not 0 default risk. https://www.ft.com/content/afc1a567-2d7d-3...

cheers, it broke 30 cents today.

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TeddyBearMarketWoof :

Reply to @ThumbTackInvestor : Hahaha u r one of the pioneer promoter here:)

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benny1 :

Watch the momentum : )

krysanify :

Coal has no future in long term. Even if it hits $1, no smart money would buy a declining industry. But then again, the market always have fools around, so who knows. Good luck!

krysanify :

Reply to @ThumbTackInvestor : can't argue with that, and already at 84%, you've made a great investment indeed :)

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mariners :

has BUMA september output been released? next will be adaro’s result then we can gauge where geo’s result will be

youying :

Reply to @mariners : Buma announced a slight drop in volume in sep today, considering it is 30 days month and it is still higher than Jun figures. it looks good to secure a good 3Qtr result with the rising Coal price. Adaro result will have to wait till next Tuesday....but their boss paint a relative optimistic view through 2018...you can read his interview in the web...

paullim :

many thanks; it is very helpful

fanoflynch :

@paullim As requested :) Hope it makes your 25 cents worth it

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ThumbTackInvestor

$Geo Energy Res(RE4.SI)

Just FYI for those who monitor short interest closely enough:
My remaining 50,000 shares just got returned last week.

My shares literally got loaned out a couple of months after I initiated my position back in October 2016.
Since the start of 2017, varying amounts of between 50,000 to 250,000 shares were loaned out at any 1 time, and returned as well.
The shares were loaned out in 50,000 blocks at any 1 time (I get a mailer each time from SGX)
and the holding period was approximately 2 - 4 weeks or so

All my shares were returned except this 50,000 shares, since ard June.
For the past 4 months, this 50,000 shares were loaned out, but this was finally returned last week. (damn, no more fees to collect after this month)

So for the 1st time in 2017, I currently have 0 shares of Geo Energy loaned out.

Read what you will into these activities, personally, I have given up reading into it, I only know the fees will be credited to me every month.
Initially, I tried reading into the movements of the guys shorting it (presumably), but quickly gave up when I realized it's a fruitless endeavor.

On a whole, they have lost money... I'd say 4 out of 5 times the shares were loaned out. Or maybe 3 out of 5.
This recent 50,000 returned, would've netted the borrower a lot more losses considering the share price rose + the borrowing costs for me and for SGX, since June 2017.

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heartlandboy
Expiry:
Target Price
$0.56
(+89.83%)
NOW:

Initiated a new position 2 weeks ago on $Geo Energy Res(RE4.SI). I think it is grossly undervalued. This is a turnaround play so I am a little more cautious than usual. Investment merits are:

1. TBJ mine to drive its next leg of growth
2. Coal prices have been on an uptrend
3. Good dividend ratio
4. undervalued on P/E basis compared to its peers
5. Mine reserves net of cash exceeds market cap when a DCF is done.

Full write up in my blog article.

https://heartlandboy.com/geo-energy-initia...

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Newbiewinvest

Vested! Dyodd
Waiting for coming results

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Expiry:
Target Price
$0.33
(+13.79%)
NOW:
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