Company Update: Geo Energy Resources Ltd (GERL SP/RE4.SI)
Company Update: 5 March 2024
A good time to enter
- Dividend policy remained intact. Geo Energy’s FY23 results saw a 62% decline in net profit to US$62.7mn, reflecting the normalization of coal prices after a significant rise in FY22. Despite this decline, the company upheld its dividend policy by declaring a full-year dividend of S$0.02 per share, maintaining a total payout ratio of 33.7%. Production surpassed the initial target of 8Mt, reaching 8.4Mt, with the majority coming from the SDJ and TBR mines. The newly acquired TRA mine contributed 0.2Mt. While the reported net profit figure may be influenced by a one-off gain, the company demonstrated its commitment to shareholder value through its dividend policy.
- Production to rise. The acquisition of an 85% stake in the TRA mine significantly bolstered Geo Energy’s 2P reserves by over 275Mt. This expansion, combined with the mine’s low-ash, low-sulfur coal characteristics that command premium pricing, presents opportunities for increased production volume and potential revenue growth.
- Maintain OUTPERFORM. We maintain our OUTPERFORM rating on Geo Energy with a lowered TP of S$0.72 due to realisation of FY23 earnings and fully diluted number of shares.
FY23 financials update: EPS exceeded expectations.
Revenue declined 33% YoY from US$733.5mn to US$489.0mn in FY23. This decline was due to the normalisation of coal prices, whereby the average ICI4 prices fell from US$86.06 in FY22 to US$70.46 in 1H23. 2H23 revenue also fell 32% YoY to US$249.2mn and net profit declined 40% YoY to US$34.7mn. Net profit tumbled 62% YoY to US$62.7mn from the previous year high of US$163.6mn, beating our estimates of US$49.4mn. The net profit delivered was better than we anticipated due to a one-off gain on a bargain purchase line item. In 4Q23, Geo Energy proposed a final dividend of S$0.006 per share which results in a full-year dividend of S$0.02 per share. From the 9M23 results, we noticed a downward trend of revenue figures due to the declining coal prices, hence, we factored this in our valuation. For FY23, the average ICI4 price fell to US$62.96 per tonne, in line with our expectations.
Continued demand for coal.
In the coming years, we anticipate continued demand for coal, particularly in developing countries facing the dual challenge of energy affordability and economic growth. While renewable energy sources are rapidly expanding, they require infrastructure development that may initially involve some temporary reliance on fossil fuels.
Valuation & Action
We maintain an OUTPERFORM recommendation with a TP of S$0.72, based on a DCF valuation method with a WACC of 13.5%.
Risks
Coal prices are susceptible to global demand and supply fluctuations. The shifting energy landscape might pose long-term challenges for the coal industry. Weather uncertainties and execution risks may also impact production.
