Date and Broker Information

• Date: October 2, 2024
• Broker: KGI Securities (Singapore) Pte. Ltd.

1H24 Financial Performance

Geo Energy Resources Ltd reported a 14% year-on-year (YoY) decline in net profit, totaling US$24.2 million for the first half of 2024 (1H24). The decrease in profitability was primarily driven by a reduction in coal prices. Despite this, the company maintained its dividend policy, declaring an interim dividend of S$0.002 per share, with a payout ratio of 11.4%. Production volumes totaled 2.8 million tonnes (Mt), with the SDJ and TBR mines contributing significantly, while the TRA mine produced 0.3 Mt. Geo Energy recorded stable coal sales of 3.2 Mt and sustained a healthy cash profit margin of 23%.

Strategic Infrastructure Investments and Growth Initiatives

Geo Energy signed a US$150 million Engineering, Procurement, and Construction (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 is aimed at increasing the transport capacity of the PT Triaryani (TRA) mine to 40-50 Mt annually, with 25 Mt allocated for TRA. The project is expected to generate significant logistical cost savings and result in a potential annual EBITDA of US$400-500 million upon completion in early 2026.

Additionally, Geo Energy’s strategy includes diversification into infrastructure provision and exploring further collaborations in mining services and infrastructure operations through a non-binding Memorandum of Understanding (MOU) signed with its contractors.

Revised Production Targets

Due to lower coal prices and adverse weather conditions impacting production in 1H24, Geo Energy revised its full-year production forecast to 8-9 Mt, down from the initial 10-11 Mt estimate. However, the company remains optimistic about meeting this target, as production levels in July 2024 indicated an average of 35,000 tonnes per day, translating to over 1 Mt monthly from its SDJ and TBR mines.

Coal Market Outlook and Price Trends

Global coal prices declined in 1H24, with Geo Energy’s coal selling at an average price of US$56.13 per tonne compared to US$70.46 in 1H23. Despite this decline, coal remains a key energy source, particularly in developing nations such as China and India. Geo Energy expects coal demand to stabilize in the short term, supported by energy affordability concerns and economic growth challenges in these regions.

The company anticipates that coal prices will remain steady for FY24, with its growth driven more by increased production volumes rather than fluctuations in coal prices.

Valuation and Target Price

KGI Securities maintains an OUTPERFORM rating on Geo Energy, with a revised target price of S$0.68. This target is based on a discounted cash flow (DCF) valuation using a weighted average cost of capital (WACC) of 13.5%. The revision reflects lower-than-expected full-year production volume and current coal price dynamics. The analysis indicates a potential upside of 146% at the target price.

Risks and Challenges

Geo Energy faces risks related to global coal price volatility, uncertainties in the energy market, weather conditions that could impact production, and execution risks associated with its strategic investments. However, the company’s focus on cost efficiency, diversification, and infrastructure development positions it to navigate these challenges effectively.