Singapore Company Focus

Straits Asia Resources

Bloomberg: SAR SP | Reuters: STRL.SI

DBS Group Research . Equity 8 Oct 2010

A tale of contradictions
HOLD S$2.34 STI : 3,166.65
• Coal price outlook appears buoyant, as recently
Price Target : 12-Month S$ 2.30 (Prev S$ 2.20) concluded benchmark contracts indicate
Reason for Report : Change in estimates
• But continued heavy rainfall in 3Q10 at Sebuku
Potential Catalyst: Stronger than expected coal price momentum going
into 2011
will affect volumes, raise costs & impact earnings

Analyst
• We cut our FY10/11 EPS estimates by 9% and
Suvro Sarkar +65 6398 7973 1.5% respectively
suvro@dbsvickers.com
• Maintain HOLD with slightly higher TP of S$2.30
Bad weather leads to cost pressure. July and August
Price Relative
S $ R e la tiv e In d e x
saw exceptionally heavy rainfall in Kalimantan. As a result,
4 .5 0
619
work at Sebuku’s Tanah Putih pit has been affected, and
4 .0 0
3 .5 0
519 pit preparation works delayed into FY11. Thus, we lower
3 .0 0 419 our FY10 volume estimates and consequently raise cash
2 .5 0
cost estimates by about US$2-3/ton in FY10/11. While
319
2 .0 0
219
1 .5 0
1 .0 0 119 Jembayan volumes may be able to meet guidance, cash
0 .5 0
2006 2007 2008 2009
19 costs there remain high as well, at around US$49/ ton.
S t r a i t s A s i a R e s o u r c e s (L H S ) R e la t i v e S T I IN D E X (R H S ) But heats up coal prices. With Indonesian output falling,
coal prices are rising. We note recent thermal coal contracts
Forecasts and Valuation by Xtrata and BHP closing at US$98/ ton benchmark, which
is above our estimates for FY11. Thus, we raise our ASP
FY Dec (US$ m) 2009A 2010F 2011F 2012F estimates for FY10/11 to US$72/79 per ton, considering
Turnover 748 651 870 1,055 that about 30% of SAR’s volumes are spot/ index-linked
EBITDA 242 136 255 363
and another 40% of FY11 volume should be priced in 4Q,
Pre-tax Profit 219 122 241 352
Net Profit 134 83 161 236 when benchmark price is set to remain above US$95/ton.
Net Pft (Pre Ex.) 134 83 161 236
EPS (S cts) 15.5 9.6 18.7 27.3 Look for better entry points. Overall, our FY10/11 EPS
EPS Pre Ex. (S cts) 15.5 9.6 18.7 27.3 estimates are reduced by 9% and 1.5%, respectively. While
EPS Gth Pre Ex (%) 4 (38) 95 46 SAR is trading at a slight discount to peers, we feel the
Diluted EPS (S cts) 15.5 9.6 18.7 27.3
Net DPS (S cts) 9.4 5.7 11.2 16.4
execution risks are higher and note that 3Q10 may not be a
BV Per Share (S cts) 54.7 58.5 66.0 76.9 great quarter either. And if the new mine approval is
PE (X) 15.1 24.4 12.5 8.6 delayed beyond end-2010, the market may be
PE Pre Ex. (X) 15.1 24.4 12.5 8.6 disappointed again. Thus, upside potential is rather limited
P/Cash Flow (X) 15.1 24.4 12.5 8.6
EV/EBITDA (X) 9.0 16.7 8.8 5.9 for now, despite the rosy outlook for coal prices. Hence, we
Net Div Yield (%) 4.0 2.5 4.8 7.0 maintain our HOLD call at a slightly higher DCF-based TP of
P/Book Value (X) 4.3 4.0 3.5 3.0 S$2.30 (lower WACC, higher long term coal prices).
Net Debt/Equity (X) 0.3 0.5 0.4 0.2
ROAE (%) 31.5 16.9 30.0 38.2
At A Glance
Earnings Rev (%): (8.9) (1.5) 6.3 Issued Capital (m shrs) 1,129
Consensus EPS (S cts): 11.0 24.5 32.9 Mkt. Cap (S$m/US$m) 2,640 / 2,020
Major Shareholders
ICB Industry : Basic Materials PTT Asia Paciifc Mining (%) 45.6
ICB Sector: Mining Bank of New York Mellon Corp (%) 6.0
Principal Business: Coal mining company with interests in Indonesia Legg Mason Inc (%) 4.9
Free Float (%) 29.0
Source of all data: Company, DBS Vickers, Bloomberg Avg. Daily Vol.(‘000) 4,800

“In Singapore, this research report or research analyses may only be distributed “Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd
to Institutional Investors, Expert Investors or Accredited Investors as defined in the (“DBSVR”), are to contact DBSVR at +65 6398 7954 in respect of any matters arising
Securities and Futures Act, Chapter 289 of Singapore.” from or in connection with this report.”

www.dbsvickers.com
Refer to important disclosures at the end of this report
ed: JS / sa: JC
 Company Focus
Straits Asia Resources
The case for higher ASP assumptions
Higher coal prices if heavy rainfall continues. Output of
Indonesian coal companies under our coverage fell 10-12%
q-o-q in 2Q10 as heavy rainfall disrupted mining activities.
Checks with mining contractors indicate that the wet season
continued to be wetter than usual in July and August, albeit
milder than in June. The Meteorology, Climatology and
Geophysics Agency (BMKG) forecasts the wet weather in
Sumatra and Kalimantan areas will continue until October this
year, which could disrupt coal output in 2H. Possible
production shortfall in Indonesia, if the wet weather extends
into 4Q, will support prices because of lower export supply.
Meanwhile, Australian exports YTD annualized are also 20
million tons below forecast, adding fuel to the fire.
Stronger demand and possible production shortfall could lift
coal prices in 4Q. Coal had been trading at US$90-95/ton in
the past 3 months. We expect prices to rise to US$95-US$100
in 4Q10, supported by stronger demand in anticipation of
winter season as well as rising domestic demand from new
power plants. Possible production shortfall in Indonesia will
support prices further as Indonesia contributes 30% of total
seaborne trade. We are retaining our FY10F average coal
price assumption of US$95 (YTD average US$96).
Coal Price trend in YTD 2010
110 Ne w c as tle Coal P r ic e F OB (US $/ ton)
105
100
95
90
85
1-J ul
1-J an
1-F eb
1-J un
1-Mar
1-S ep
1-May
1-Aug
1-Apr
Source: Bloomberg, DBS Vickers
Forward coal price indications in the market remain strong. In
recent news, we note that Xstrata PLC has agreed to sell
around 1.2 million tons of Australian thermal coal to Tohoku
Electric Power Co (Japan’s 2nd largest coal importer) for the
October 2010 to September 2011 period at USD 97.70 per
ton. This price is close to the USD 97.75 per ton Tokyo
Electric Power Co agreed to with Xstrata earlier this month.
Considering that these negotiations are considered a
benchmark price for the October-September contracts by
many traders, the completion of these contracts at prices
Page 2
above current Newcastle spot price range indicates a rising
trend in coal prices over the next 12-months.
And why we still reduce earnings estimates for FY10/11
Sebuku volumes in FY10 to fall short of expectations. Output
from Sebuku’s Tanah Putih pit – already constrained to just
0.5m tons in 1H10 owing to low pit inventories and pit
preparation works – will be further hampered by the
continuing heavy rains in Kalimantan (Indonesia) in 3Q10. We
thus believe our earlier estimate of 1.0m tons production at
Sebuku in 2H10 may have been too optimistic and reduce the
figure to 0.7m tons.
Downside risks to our FY11 Sebuku volume estimates. We are
currently factoring in the award of final permits for Sebuku
Northern Leases by end-2010 or early-2011, and production
to start by early-2Q10. Given the uncertainty associated with
that, and the delay in pit preparation works in Tanah Putih pit
owing to the heavy rains, there could be potential downside
risk to our assumption of 2.5m tons total production at
Sebuku in FY11.
This implies higher costs at Sebuku could continue into 2011.
The lower than expected production, loss of man-hours, and
delay in completing the pit preparation works in 3Q10 will
lead to higher-than-expected costs in Sebuku in 2H10 and
beyond, in our opinion. Our full-year FY10 cash cost estimate
for Sebuku is thus raised from US$40/ ton to US$47/ton. We
now expect costs to average at around US$40/ton in Sebuku
in FY11, since Tanah Putih pit will continue to be constrained
even as the lower strip-ratio Northern Leases contributes to
lowering overall costs.
Jembayan costs not likely to fall much in near term. While
Jembayan mine operations have been affected to a lesser
degree by the rains than Sebuku, we do not expect a repeat
of the strong performance in 1H10, when the mine produced
4.5m tons (annualized 9m tons). We expect 8.5m tons
production for full year FY10, increasing to 9.5m tons in
FY11. The new loading facility is not expected to be up in the
near term and hence, we do not think the mine will be able
to produce at full potential in FY11. Costs will continue to
range around US$47-49/ ton, as the Company will have to
bear additional costs of alternative loading facilities until the
new loader is built.
 Company Focus
Straits Asia Resources

Valuations look fair
Trading at a discount to peers – is this justified? SAR is
currently trading at 12.5x FY11 and 8.6x FY12 earnings, at a
slight discount to Indonesian peers trading at an average
13.1x FY11 and 10.7x FY12 earnings. However, we believe
the discount is justified as SAR’s execution risks are
significantly higher, given its smaller size, and the Group has
not delivered over the last 2 quarters and is unlikely to deliver
as per expectations in 3Q10 as well, albeit partly owing to
circumstances beyond its control.
Add to it the uncertainties regarding the timing of the new
mine approval that partly underpins the “supercharged”
growth we expect in FY11/12. If the new mine approval is
delayed beyond end-2010, we feel the market may be
disappointed again. Thus, we believe that upside potential is
still rather limited at this point of time, despite the rosy
outlook for coal prices. We maintain our HOLD call at a
revised DCF-based TP of S$2.30 (WACC revised down
to11.5% to reflect lower risk free rates in Indonesia, long
term coal price assumptions raised).
Capex commitments reduced from FY11, dividends look
secure. We would, however, like to note that SAR has a 60%
dividend payout policy and projected dividend yield of 5.1%
in FY11 and 7.4% in FY12 is better than peers, and provides
downside support to the share price.

Peers Comparison Table

Mkt Cap Price Opg

Company (US$b) (Local $) PER (x) P/B P/S EV/EBITDA ROE Margin
2010F 2011F 2012F
Indonesia peers
Adaro Energy 7.3 2050 17.5 12.8 9.6 3.7 2.5 8.1 27.8 35.0
Indo Tambangraya 5.5 43200 17.3 12.8 10.5 7.1 3.3 10.3 48.0 28.9
Batubara Bukit Asam 5.2 20250 19.4 13.6 12.0 8.6 5.7 13.4 56.2 39.7
Average 18.1 13.1 10.7 6.5 3.8 10.6 44.0 34.5

China peers
China Shenhua Energy 73.4 34.55 16.7 13.8 12.1 3.3 4.4 7.6 19.9 39.3
China Coal Energy 20.7 13.38 16.9 13.7 11.3 2.3 2.3 7.3 12.8 18.8
Yanzhou Coal Mining 13.3 20.65 15.0 12.4 10.9 2.9 3.3 8.5 14.7 26.6
Average 16.2 13.3 11.4 2.8 3.4 7.8 15.8 28.2

Others
Banpu Public Company Ltd 6.7 740 13.2 11.0 9.4 3.9 3.3 12.3 32.0 23.7

Straits Asia Resources 2.0 2.34 24.5 12.5 8.6 4.2 2.6 12.2 31.5 36.1

Source: DBS Vickers, Bloomberg

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 Company Focus
Straits Asia Resources

Income Statement (US$ m) Balance Sheet (US$ m)

FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F
Turnover 748 651 870 1,055 Net Fixed Assets 702 835 865 866
Cost of Goods Sold (448) (462) (537) (628) Invts in Associates & JVs 0 0 0 0
Gross Profit 300 189 333 427 Other LT Assets 88 83 79 74
Other Opng (Exp)/Inc (58) (49) (74) (59) Cash & ST Invts 57 1 35 97
Operating Profit 243 140 259 368 Inventory 32 7 8 9
Other Non Opg (Exp)/Inc (1) (5) (5) (5) Debtors 98 85 114 138
Associates & JV Inc 0 0 0 0 Other Current Assets 10 10 10 10
Net Interest (Exp)/Inc (23) (14) (14) (12) Total Assets 987 1,021 1,111 1,195
Exceptional Gain/(Loss) 0 0 0 0
Pre-tax Profit 219 122 241 352 ST Debt 207 1 1 1
Tax (85) (39) (79) (116) Other Current Liab 156 106 123 144
Minority Interest 0 0 0 0 LT Debt 0 250 250 210
Preference Dividend 0 0 0 1 Other LT Liabilities 152 160 168 176
Net Profit 134 83 161 236 Shareholder’s Equity 472 505 570 664
Net Profit before Except. 134 83 161 237 Minority Interests 0 0 0 0
EBITDA 242 136 255 363 Total Cap. & Liab. 987 1,021 1,111 1,195

Sales Gth (%) 27.9 (13.0) 33.6 21.2 Non-Cash Wkg. Capital (16) (4) 9 14
EBITDA Gth (%) 23.4 (43.9) 87.6 42.6 Net Cash/(Debt) (150) (249) (216) (113)
Opg Profit Gth (%) 28.0 (42.2) 84.7 41.9
Net Profit Gth (%) 7.3 (38.0) 94.8 46.1
Effective Tax Rate (%) 39.0 32.0 33.0 33.0
Cash Flow Statement (US$ m) Rates & Ratio
FY Dec 2009A 2010F 2011F 2012F FY Dec 2009A 2010F 2011F 2012F
Pre-Tax Profit 219 122 241 352 Gross Margins (%) 40.1 29.0 38.3 40.5
Dep. & Amort. 13 22 24 24 Opg Profit Margin (%) 32.4 21.5 29.8 34.9
Tax Paid (85) (39) (79) (116) Net Profit Margin (%) 17.8 12.7 18.5 22.3
Assoc. & JV Inc/(loss) 0 0 0 0 ROAE (%) 31.5 16.9 30.0 38.2
Chg in Wkg.Cap. (45) 42 (13) (5) ROA (%) 14.4 8.2 15.1 20.4
Other Operating CF 79 0 0 0 ROCE (%) 18.9 10.9 18.3 24.2
Net Operating CF 181 147 172 255 Div Payout Ratio (%) 60.7 60.0 60.0 60.0
Capital Exp.(net) (150) (150) (50) (20) Net Interest Cover (x) 10.6 10.0 18.5 31.6
Other Invts.(net) 0 0 0 0 Asset Turnover (x) 0.8 0.6 0.8 0.9
Invts in Assoc. & JV 0 0 0 0 Debtors Turn (avg days) 38.8 51.5 41.9 43.7
Div from Assoc & JV 0 0 0 0 Creditors Turn (avg days) 86.4 91.8 77.9 77.6
Other Investing CF (4) 0 0 0 Inventory Turn (avg days) 15.3 15.2 5.1 5.1
Net Investing CF (154) (150) (50) (20) Current Ratio (x) 0.5 1.0 1.3 1.8
Div Paid (81) (50) (97) (141) Quick Ratio (x) 0.4 0.8 1.2 1.6
Chg in Gross Debt (111) 44 0 (40) Net Debt/Equity (X) 0.3 0.5 0.4 0.2
Capital Issues 26 0 0 0 Net Debt/Equity ex MI (X) 0.3 0.5 0.4 0.2
Other Financing CF 1 (22) 8 8 Capex to Debt (%) 72.7 59.9 20.0 9.5
Net Financing CF (165) (27) (89) (173) Z-Score (X) 2.5 3.3 3.7 4.2
Net Cashflow (139) (31) 34 62 N. Cash/(Debt)PS (US cts.) (13.3) (22.1) (19.1) (10.1)
Opg CFPS (US cts.) 20.0 9.3 16.4 23.0
Free CFPS (US cts.) 2.7 (0.3) 10.8 20.8
Quarterly / Interim Income Statement (US$ m) Segmental Breakdown / Key Assumptions
FY Dec 3Q2009 4Q2009 1Q2010 2Q2010 FY Dec 2009A 2010F 2011F 2012F
Turnover 200 233 153 192 Revenues (US$ m)
Cost of Goods Sold (128) (152) (123) (145) Coal Mining 735 651 870 1,055
Gross Profit 72 81 30 47 Commodities Trading 0 0 0 0
Other Oper. (Exp)/Inc (9) (28) (10) (9) Marine Engineering 13 0 0 0
Operating Profit 63 53 20 38 748 651 870 1,055
Other Non Opg (Exp)/Inc 0 15 1 (3)
Associates & JV Inc 0 0 0 0 Total
Net Interest (Exp)/Inc (5) (5) (4) (3) Gross Profit (US$ m)
Exceptional Gain/(Loss) 0 0 0 0 Coal Mining 298 189 333 427
Pre-tax Profit 58 63 17 33 Commodities Trading 0 0 0 0
Tax (19) (25) (6) (9) Marine Engineering 3 0 0 0
Minority Interest 0 0 0 0 300 189 333 427
Net Profit 39 38 11 23
Net profit bef Except. 39 38 11 23 Total
EBITDA 63 68 22 35 Gross Profit Margins (%)
Coal Mining 40.5 29.0 38.3 40.5
Sales Gth (%) 14.0 16.5 (34.1) 24.8 Commodities Trading N/A N/A N/A N/A
EBITDA Gth (%) 25.5 7.0 (68.1) 63.2 Marine Engineering 20.2 N/A N/A N/A
Opg Profit Gth (%) (6.1) (16.2) (61.7) 86.2 40.1 29.0 38.3 40.5
Net Profit Gth (%) 80.1 (1.4) (70.6) 107.6
Gross Margins (%) 36.1 34.8 19.7 24.3 Total
Opg Profit Margins (%) 31.7 22.8 13.3 19.8 Key Assumptions
Net Profit Margins (%) 19.3 16.3 7.3 12.1 Coal Price 82.1 72.6 79.0 79.4
Sales Volume 9.2 9.7 12.0 14.5
Cash Cost 47.5 47.6 44.8 43.3

Source: Company, DBS Vickers

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 Company Focus
Straits Asia Resources

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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 Company Focus
Straits Asia Resources

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