March 23

Will Geo Energy Continue to Deliver?

In a recent press release on 28 Feb 2017, Geo Energy (SGX: RE4) seems to have achieved a remarkable milestone!

As a quick background, this company primarily operates as a coal producer and a mine contractor in Indonesia and Singapore. It also provides mining contracting services and equipment rental.

So… what is this good news all about? Read on to find out. Don’t say we bo-GEO (bojio)!

Remarkable Milestone

Based on the report, the company has achieved its highest quarterly earnings since its listing. Its net profit for 4QFY16 has skyrocketed to US$14.7 million while its revenue jumped to US$92 million compared to US$3 million in 4QFY15. That is around a thirty-fold jump!

The huge earnings can be attributed to 2 reasons:

  1. Higher coal prices and higher volume delivered – Coal prices has strengthened in 4Q2016 which translate to a 24% increase in average selling price (from US$31.4 per tonne to US$38.93 per tonne). To top it off, the company has delivered a total of 2.4 million tonnes of coal that quarter which has far exceeded its initial target of 1.8 million tonnes.
  2. A crackdown in China’s coal industry – In April 2016, China has reduced the number of statutory working days for coal miners from 330 days to 276 days a year in order to cut the country’s dependence on polluting fossil fuels. With this drop in domestic supply, Chinese firms may have to turn to coal imports to fuel their businesses instead. You can read more about it here.

First Dividend since IPO

To all the dividend hunters out there, what comes next can be good news for you. Due to its surge in net cash from operating activities in 4Q2016 by US$ 49.7 million, the company has proposed its first dividend since IPO of S$0.01 per share.

By proposing its first dividend, it can be seen as a clear indication of continued growth in profitability going forward. Its cash and bank balances currently stand at US$ 67.7 million as of 31 December 2016, more than sufficient to pay out the dividends in the near future too.

Growth Prospects

As of now, coal prices remain high at US$43.95 per tonne (as of 24 February 2017). The report states that “To date, demand has remained strong due to the high switching costs for energy”. The company has also been involved in acquisitions to increase coal production volume, such as the acquisition of PT Tanah Bumbu Resources (TBR). Furthermore, it is reported that the company has secured agreements of 7 million tonnes of coal and a prepayment of US$ 40 million for 2017.

On the contrary, China will be ending its winter in March which may inevitably see a slight fall in coal consumption as the weather turns warmer. In addition, China has recently relaxed its working day restriction on its coal industry due to surging prices spinning out of its expectation. You can read more from the article here.

Thus, investors should still do their own due diligence on the company as its financial performance relies heavily on the coal prices fluctuations.

Based on its closing price of S$0.31, Geo Energy commands a cheap P/E ratio of 11.40 and dividend yield of 3.2% once the dividend of S$0.01 is declared.

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Tags

coal, geo energy


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