Company Update: Geo Energy Resources Ltd (GERL SP/RE4.SI)
Company Update: 2 October 2024
Navigating challenges with strategic investments.
- Dividend policy holds firm despite market challenges. Geo Energy reported a 14% YoY decline in net profit to US$24.2mn for 1H24, primarily due to a reduction in coal prices. Despite this, the company maintained its commitment to shareholders by declaring an interim dividend of S$0.002 per share, representing a payout ratio of 11.4%. Production volumes totaled 2.8 Mt, mainly from the SDJ and TBR mines, while the TRA mine contributed 0.3 Mt. Stable coal sales of 3.2 Mt and a resilient cost model supported a healthy cash profit margin of 23%.
Accelerated growth through infrastructure investment and diversification
Geo Energy recently signed a US$150mn EPC contract with CCCC First Harbor Consultants and Norinco International Cooperation to develop a 92 km hauling road and jetty in South Sumatera and Jambi Province, Indonesia. This infrastructure will boost PT Triaryani (TRA) mine’s transport capacity to 40-50 Mt per year, with 25 Mt allocated for TRA. The project’s deferred payment mechanism minimizes upfront cash outlay, allowing the infrastructure to generate revenue before payments begin. Upon completion in early 2026, not only will this development scale up production to 25 Mt annually but also it results in significant logistical cost savings, potentially generating US$400-500 mn in annual EBITDA. The project also diversifies Geo Energy’s revenue stream as an infrastructure provider.
1H24 financials update: Navigating price pressures with cost efficiency
Despite maintaining stable coal sales of 3.2 Mt in 1H24, Geo Energy’s revenue declined by 29% YoY to US$169.4mn, primarily due to lower ICI4 coal prices, averaging US$56.13 per tonne compared to US$70.46 in 1H23. Higher general and administrative expenses of US$6.2mn and finance costs amounting to US$9.9mn also impacted its financials, following the acquisition of PT Golden Eagle Energy Tbk. Production was adversely affected by unfavorable weather conditions in the first half of the year. However, cash profit per tonne remained robust at US$11.94, reflecting its cost-efficient model where cash costs decrease in line with lower ICI4 prices. Geo Energy declared a second interim dividend of S$0.002 per share, matching the 1Q24 dividend and representing an 11.4% payout ratio, and remains committed to assessing its year-end performance for final dividend declaration.
Valuation & Action
We maintain an OUTPERFORM rating with a target price of S$0.68, based on a discounted cash flow (DCF) valuation using a weighted average cost of capital (WACC) of 13.5%.
Risks
Global coal price volatility, evolving energy landscapes, weather uncertainties, and potential execution risks affecting production.
