Sakari

Sakari: DBS issues coal sector report trimming 2012F of thermal coal to US$115/t and hard coking coal to US$241/t. Valuations unlikely to test 2008 lows given favourable sector demand-supply dynamics and stronger balance sheet for miners now with 41% on avg over last 3 mths with 50% below 1 std dev. House prefers Chinese miners over Indonesian miners due to pricing power and captive domestic mkt.

Downgrades SAR to Hold from Buy with TP slashed from $3.30 to $1.89 due to smaller scale and earnings more vulnerable to coal price shocks. Production should be driven (CAGR 11% over FY10-12) by Sebuku Northern Leases with sales of higher margin coal from Sebuku to drive 62% CAGR in earnings but cautions growth may slow if coal prices falls. However in house’s base case scenario FY12 EPS is cut by 8% and sees further drops of 15% and 31% is bear and worst case scenarios. Highlights that co’s earnings are more vulnerable to changes in coal prices due to higher cost base.