Geo Energy H2 net profit rises to US$129.8m on stronger coal prices, proposes final dividend of S$0.05
INDONESIAN coal producer Geo Energy Resources RE4 on Thursday (Feb 24) posted a net profit of US$129.8 million (S$175.4 million) for the second half of the fiscal year ended December, up from earnings of US$28.4 million in the corresponding year-ago period.
This brought the group's full-year earnings for FY2021 to US$177.9 million, up 87 per cent from FY2020's earnings of US$94.9 million.
The better performance was due chiefly to stronger coal prices, Geo Energy's chief executive Tung Kum Hon told The Business Times in an exclusive interview. The average Indonesian Coal Index price for 4,200 GAR (gross as received) coal (ICI4) more than doubled to US$65.85 per tonne in 2021 from US$29.29 per tonne in 2020.
Geo Energy's revenue for H2 rose to US$421.6 million from US$146.1 million in the year-ago period due to an increase in sales volume and higher average selling prices (ASPS).
Although higher prices were good for the company, the coal market was volatile over H2. Index prices hit historic highs with tight domestic supply in China and recovering global demand, but then pared some gains on the back of the Chinese government's interventions to contain coal prices.
Not everything was smooth sailing for the group in 2021, noted Tung. For instance, there was a resurgent wave of the pandemic, extreme weather conditions that impacted the company's operations, as well as export bans introduced by the Indonesian government. All these factors "hampered (Geo Energy's) production and sales activities", he said.
But the group moved quickly to capitalise on the broad-based economic recovery and higher demand by ramping up production. As Tung puts it, the main driver of Geo Energy's bottomline is revenue, although companies in the coal industry often see their profit figures affected by "various factors" such as weather and geopolitical issues.
In H2, the group sold 2.7 million tonnes and 3.3 million tonnes of 4,200 GAR coal from its SDJ and TBR coal mines. Cash profit from the coal mining segment came in at US$204.8 million, or an average of US$34.13 per tonne versus US$6.21 per tonne in H2 2020. However, the rise in cash profit was offset partially by certain higher production cash costs linked to the coal index prices.
Geo Energy's board of directors has recommended a final dividend of S$0.05 per share in 2021, up from S$0.008 per share in the comparable year-ago period. This took the group's total dividend for FY2021 to S$0.09 per share.
Tung for one believes that Geo Energy is currently undervalued by the market, based on the valuation of the company's coal reserves under the JORC and VALMIN codes - which are international professional codes for investors in the resources industry.
The company's closing price of S$0.41 on Feb 23 also translates to 2.4 times its FY2021 earnings per share, and Tung is expecting Geo Energy to do well in FY2022 is coal prices remain elevated.
Geo Energy's cost of production is also relatively low, he said. As long as coal prices stay above US$22, the company will have a profit margin. The company has also captured the interest of corporate investors in Spain and Australia, among other countries, he added.
The company's involvement in coal, which is typically not in line with the sustainability theme that has washed over financial markets, could be one reason for the stock being undervalued, reckons Tung.
However, as far as business goes, Geo Energy has not seen much of an impact as it has offtake agreements with Macquarie Bank and Trafigura. These allow the company to draw upon prepayments if necessary.
He said: "There are fewer funds and banks that can invest or lend to companies that are purely in the coal business due to increasingly stringent ESG considerations. The recent COP26 further emphasises this point."
"We also maintain a strong balance sheet backed by cash, and the early redemption of our USD bonds have us effectively debt-free. This reduces any refinancing risks that some mining companies who have over-leveraged themselves may face."
However, he stresses that the company remains committed to complying with all applicable environmental laws and regulations to minimise environmental risks and damage.
Shares of Geo Energy closed on Thursday at S$0.395, down 3.7 per cent or S$0.015.
