$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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20 likes 42 comments
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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KiaseeRemisier

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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When I see the results to price disparity, I think Christmas has come early. Never thought a stock like this could present opportunity after opportunity again and again.

Increased my deemed interest by another 330,000 shares ever since earnings release and looking forward to more if the story continues to be this good relative to price.

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"Our measures to deliver our strategy to shareholders and create shareholders value:
- Interim dividend of 1 SG Cents per share, representing 28 percent of the 9 months earnings per share of 3.6
SG Cents for 2017 or 3.5 percent dividend yield based on current share price of 28.5 SG Cents as at closed of
market trading on 10 November 2017. Together with the 1 SG Cents paid on 30 May 2017, the total dividends
paid and to be paid for the year to-date in 2017 is 2 SG Cents or 7.0 per cent based on the current market
share price of 28.5 SG Cents. Expect to continue paying out dividends to shareholders over time.
- Maintaining our production cash costs with current increasing commodity prices for coal as some of the
production costs are linked to commodity prices.
- Simplifying our financial targets for the Group going forward to focus on three key metrics:
• Return on Capital Employed (ROCE)
• Cash Profit ratio
• Working Capital Management and fast Cash Conversion Cycle "

So, will the yield maintain at 7% (assuming 0.02 on 0.285), or will the share price move upwards to make the yield become a more "normal" number? Pick and choose from any of the yield-to-price below, and suddenly the medium-term price targets don't sound like grandoise delusions anymore. But if the price stays at 0.285, well a 7% yield isn't too bad either.

At:
6% yield = 0.33
5% yield = 0.40
4% yield = 0.50
3.5% yield = 0.57

From my long report a few weeks ago:
"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)."

Again, as long as they continue to make more money, they will have excess capital to return to shareholders, and whether or not the stock price itself moves, we ultimately stand to benefit one way or another. Also, don't forget that the payout ratio assuming annualized 4.8 cents EPS and 2 cents dividend is a disgusting mere 42%.

The story of the golden goose continues...

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1 year ago, Geo released Q3 earnings, so I am hoping today is the day. Here are some facts that although seem obvious, require reminding because our emotions tend to cloud our judgement.

- The share price movement after earnings does not represent the quality of the earnings report. The quality is for you as an investor to decide. Do you like the story?

- On the same note, don't try to predict whether the price will go up or down after earnings release, it is completely unpredictable, even if 10/10 things are going right, it can still go down.

- There will always be some justification for the price movement after earnings, but it's all about perspective. Assuming the scenario whereby production is mediocre (1.5-2m), but profit is high as a result of coal prices:

--> If the price goes up, people will say it's because of record profit
--> On the other hand, if the price goes down, people will say it is because production level was disappointing

It is exactly the same scenario, but different interpretation.

What truly matters:

I think everyone invests in companies because we want a share of the money they make, so we all want them to make MONEY, NOT coal. Coal 可以吃的吗? Our shares in Geo are quoted in SGD, not in metric tonnes. It's more favourable if they make a record profit without meeting their production target, than to exceed their production target but make less profit. The production target was given in the first place to allow us to make a rough estimation of their FY2017 profit based on the fluctuating coal prices. But if they mine 8m tonnes for the entire year and their profit is more than last year's, then all the better. Less effort, more results, good for the weary miners, good for us. I personally think they will do better than 2.2m tonnes, and I have my reasons for that, but I don't really care because my eye is on the money.

Given their current grossly undervalued P/E ratio, I don't even think there is any growth expectation priced into this thing. It is priced as if coal prices are nose-diving and all the miners went on strike. In about 2-3 years time, at this coal price and stock price, the P/E ratio is going to be 2. The company will generate enough money to buy itself up in 2 years. So, if the stock price drops today on good results, we all know what we're buying for ourselves this Christmas :)

On a side note, I remember in April the stock price fell from 0.34 to 0.25, rationalized by coal prices "plunging" from $44 to $36 per ton. Now that the coal prices are at record highs, the stock price hasn't recovered, and people blame "low production". There will always be people attempting to rationalize the price of a stock and there will always be something to blame but it's a futile attempt. Here are 5 reasons why Geo today is better than Geo 8 months ago:

1. They have settled the MTN debt issue
2. They are producing more coal tonnage than last year
3. The coal price is higher today
4. They have a new mine acquisition completed with an offtake agreement 99% guaranteed
5. The company is selling cheaper than it was 8 months ago - so how do you rationalize this?

Simplistically, in the long-run, earnings are DIRECTLY correlated to the value of a stock. It is that easy, doesn't take a genius to know that. The key is to find out what drives the earnings, and in Geo it is very easy to see. Ultimately, more money earned is more money in the bank account. You are a shareholder, you own a share of the earnings, and it will become yours eventually (dividends, share buybacks, company buyout, net equity increase), so just be patient, give them a few years, keep your eye on their profit, and don't hope for a stock price spike up after the report. It is clear that the company is doing well, we don't need the stock price movement to validate our analysis. Thanks for reading.

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For a high-conviction buy like this, what sort of portfolio allocation (%) do you guys use? Some say no more than 10% for diversification and risk-management purposes. How about 30%?

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