Straits Asia-OCBC

Record earnings in FY08. Straits Asia Resources Ltd's (SAR) FY08 results
were ahead of the street's as well as our expectations. Revenue accelerated
by 133.2% to US$585.2m on strong coal prices and higher production
volumes, leading to a 335.6% surge in net profit to US$124.4m. Average
selling price (ASP) of thermal coal rose 66% to US$70/ton in FY08 on
robust demand for energy, while production volume more than doubled to
8.6Mt from 3.5Mt, thanks partly to contributions from Jembayan mine which
was acquired in Dec 07. In terms of its interim performance, 4Q08 revenue
grew 147.2% YoY to US$151.8m, while net profit for the quarter soared
316.4% YoY to US$39.7m. A final dividend of 2.18 US cents has been
declared, bringing total dividends for the year to 6.83 US cents (yield:
12%), in line with the group's 60% dividend payout policy.
Profit margins are looking good. Gross profit margin for FY08 ballooned
by 16.6ppt to 39.4% on sky-high coal prices, while net profit margin
expanded by 9.9ppt to 21.3%. We are anticipating further improvements
in profit margins in FY09 as SAR has contracted higher coal prices for its
output this year. 73% of its FY09 output has been priced at US$114/ton,
representing a 63% surge from the US$70/ton ASP achieved in FY08.
Nevertheless, we have conservatively assumed a lower blended ASP for
FY09, implying an additional 18.8ppt improvement in gross profit margin
to 58.2%.
Vast improvement in cash flows. Operating cash flow improved to
US$191.5m from US$33.0m a year ago thanks to strong coal prices and
higher output. This led to a significant improvement in net cash flow to
US$141.4m vs. US$6.8m a year ago. We believe that SAR will continue to
deliver strong operating cash flows in FY09 given its strong order book,
and this will support its ability to repay borrowings and sustain dividend
payouts. Nevertheless, we have assumed a more conservative dividend
payout ratio of 40% to allow for cash conservation in the event of a protracted
credit crunch.
Still deserves a BUY. Management did not have any updates on its parent
company's divestment exercise, except that talks were still in progress.
We have raised our WACC assumptions to take into account higher
borrowing costs and have eased our thermal coal price assumptions beyond
FY10 in view of the weaker demand for energy. As a result, our DCF-based
fair value estimate eases to S$1.15 (from S$1.35). We maintain our BUY
rating on the stock.