Straits Asia Resources - DBS Vickers

BUY S$3.07 FSSTI : 3,046.54
(Initiating Coverage)
Price Target : 12-Month S$ 3.89
Reason for Report : Initiating Coverage
Potential Catalyst: Mining license to exploit norther part and extension
of Sebuku mining concession area, acquisition of coal mining

Sizing up
Story: Straits Asia’s aggressive expansion has paid off.
The acquisition of Jembayan mine and expansion of
Sebuku mine boosted Straits Asia’s volume of resources
by almost three-fold to 387m tonnes, from 103m
previously. Accordingly, production is set to surge to
record levels of 9.5m tonnes in FY08, 10m tonnes in
FY09, then 11m tonnes by FY10. The recent rally in
international spot price for coal will directly benefit the
company’s performance. Supply constraints and growing
demand will keep prices at high levels. We foresee that
by 2009, infrastructure problems occurred in some
major coal exporting countries will be alleviated, hence
we might see spot prices eased but robust demand will
keep it at high levels above its historical average. We
estimate coal prices of US$100/tonne for FY08,
US$90/tonne for FY09, and US$80/tonne for FY10.
Point: Increasing expenditures on new infrastructure to
achieve its production target and strong international
coal spot prices would translate to buoyant performance
for the company in the coming years. We expect
revenue to grow 143% and 42% and bottom-line by
541% and 95% for FY08 and FY09 respectively.
Exploiting resources will be key, as a large portion of the
resources (over 80%) is located on mining concession
area where the mining licence is still being processed.
Relevance: Our DCF-based valuation is premised on
WACC of 9.35%, debt-to-equity ratio of 35% and
terminal growth of 0%. Our target price of S$3.89
implies PEs of 16.7x and 8.6x for FY08 and FY09
respectively. We initiate coverage on the counter with a
BUY call.